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After the Recession, Belt-Tightening

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Posted on Jul 4, 2010

By Ruth Marcus

Stop procrastinating. That is always good advice, and always hard to heed. But in some situations procrastination is more damaging than others. One of those involves getting the country’s fiscal health in order. The latest advice to stop procrastinating—or, perhaps more important, the latest explanation of why procrastinating will only make matters worse and the fix that much more painful—comes courtesy of the Congressional Budget Office, and its new report on the long-term budget outlook.

The CBO, like other sensible economic analysts, is not calling for an immediate retrenchment to deal with record deficits—far from it. As the report explains, “With economic activity and employment currently well below the levels that could be achieved by fully utilizing the nation’s labor force and capital stock, raising revenues or curbing spending immediately would probably slow the economic recovery.”

Translation: It’s too soon to hit the brakes.

“However,” the report adds, “the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are implemented after the period of economic weakness, the smaller will be the damage to the economy from rising federal debt.”

Translation: The longer we dawdle, the harder this is going to be.

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That might be obvious—although, then again, perhaps not to those who make the case that faster-than-expected economic growth could make the problem evaporate, or slowing the rise of health care spending could make it much less daunting. Perhaps, but that is a dangerous hope on which to rely. I might win the lottery tomorrow, but it’s not a very smart retirement plan.

The CBO report shows why. It looks at the “fiscal gap”—the extent to which government would need to immediately and permanently cut spending, raise taxes or both—in order to stabilize the national debt at its level as a share of the economy at the start of this year. Not that this is anything to be happy about: 53 percent of gross domestic product, a level not seen since shortly after World War II.

Imagine that policymakers want to keep the debt stable through 2035. Assume a realistic policy scenario—most of the Bush tax cuts continue, the alternative minimum tax is adjusted to keep pace with inflation, scheduled cuts in Medicare reimbursements to doctors are canceled.

If the new austerity begins in 2011, it would require an annual increase in revenue or cut in spending equivalent to 4.8 percent of GDP. This would amount to about $715 billion (in 2010 dollars) the first year—more than the entire defense budget. But waiting until 2015 boosts that number to 5.7 percent of GDP, meaning finding $1 trillion of savings that first year. Waiting until 2020 boosts the necessary trims to 7.9 percent of GDP, or a daunting $1.5 trillion the first year alone.

And this calculation does not reflect the true cost of waiting, as the overhang of debt crowds out investment and drives up interest rates. “Incorporating such effects would make the impact of delaying policy changes even more severe,” the report warns.

Once this ugly recession is past, the country is in for an ugly period of belt-tightening. How ugly will depend on how quickly policymakers manage to act.

Ruth Marcus’ e-mail address is marcusr(at symbol)washpost.com.

© 2010, Washington Post Writers Group


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JDmysticDJ's avatar

By JDmysticDJ, July 7, 2010 at 3:51 pm Link to this comment

eir

Obama was a great orator, but he’s not much of a leader is he? Obama strikes me as being the type of personality who puts his trust in the “Best and the Brightest,” and is inclined to relegate authority to those who are the supposed experts in their areas of expertise. Like many, I believe he made all the wrong choices when he chose his Cabinet, advisors, and Staff. Change can not be achieved by maintaining the status quot. I’ll suggest that he felt overwhelmed by the problems that confronted him and the nation, when he came to office, so he turned to the “experts” for assistance.

One could argue that the most effective leaders have been totalitarian ideologues who led their nations to tyranny and destruction.

I see many potential leaders on the right, who are vying for political power, leaders who will create, not a newer positive reality, but who will continue their self serving policies, and failed ideology with authority, while being supported by their dogmatic followers.

I see worthy leaders on the left, who are not viable. You hope for a leader who will create a new positive reality, but where is this viable leader with his followers? I see potential followers from within the 36% percent of the electorate who designate themselves as Democrats (A left wing third party will diminish that 36%,) along with a small percentage of independents who lean to the left. Recent polls have indicated that most independents are now leaning to the right. Gallup reports, July 7, 2010, 44% approval, 46% disapproval. Right wing propagandists, and media sycophants, with the help of some left wing critics, have been very successful at discrediting Obama and the Democrats.

I have no faith that Obama will change, but I do have a glimmer of hope, and I’m firmly convinced that Obama, as bad as he is, will be, and is, better than any right wing alternative.

Vehement criticism, and lack of support for Obama, and the Democrats, by the left will only aggravate a seemingly hopeless political reality. The left needs to make a concerted effort in support of Obama and the Democrats, in order to forestall a return to power by the right. At the present time, I personally, only have a glimmer of hope that that will happen.

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By eir, July 6, 2010 at 1:37 pm Link to this comment

Democratic Rep. McGovern and Rep. Obey and 151 of their Democratic colleagues do not trust the president’s promise of troop withdrawal. 

Why the fuck is this meat-grinder still going on in Afghanistan anyway?

Obama came in on a tide of optimism and hope in him as a person.  There was great goodwill towards the change he promised.  The Republicans were at a very low point in their party’s history.  He had the political tools necessary to get a decent healthcare bill.  It became obvious that he would not be the champion of such a bill, along with some key Senate tools like Sen. Max Baucus.

Not all Democratic and Republican politicians are tools, but many of them are.  This country is in an epic crisis that can only be managed humanely by those who aren’t. 

“Political reality” is an excuse for not changing anything.  Leaders change the “reality” they don’t abide by it.

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JDmysticDJ's avatar

By JDmysticDJ, July 5, 2010 at 5:25 pm Link to this comment

The real “Kool-Aide” that is being doled out here is that there is no difference between Democrats and Republicans.

Last week,

“Reps. McGovern, Obey (D-WI) and Jones (R-NC) introduced an amendment to the war funding bill that would have forced the administration to present Congress with an exit strategy and timetable for the withdrawal of troops from Afghanistan, and it was supported by 162 Members of Congress. That’s 24 votes more than a similar amendment received just a year ago.”

153 Democrats (A majority of Democrats) and 9 Republicans voted in favor of the amendment.

The Iraq War Resolution (2002) was passed 297–133. 82 Democrats and 215 Republicans voted Aye, 126 Democrats and 6 Republicans voted Nay.

Due to Senate Rules (Filibuster,) Republicans had the power. The Health Care Reform Bill was shaped by The Senate Republicans and a handful of “Blue dog” Corporate Democrats. The Bill was the best that could be passed, and every Republican voted against the weakened Bill. Some suggest that this Bill was all a charade and actually a secret plot between Republicans and Democrats in order to serve the interests of Health Care Corporatists. Some are out of their freaking minds.

Due to the previous experience with the failed “Hilary Care” proposal put forth by the Clinton Administration in the early 90’s, the Obama Administration chose not to make enemies of the powerful, and deep pocketed, pharmaceutical companies. That decision had nothing to do with political expedience; it had everything to do with political realities.

The Republicans recently voted unanimously against extending unemployment benefits, so now 1.7 million of the unemployed now have no income. The consequences of this action should be obvious to everyone.

There is much more to be said, but I’m really tired of having to point out the obvious differences between the two parties.

Anyone who claims that the Democrats are “the real socio-fascists,” is either a real socio-dimwit, or a not so subtle shill for the most fascistic.

Roosevelt and Johnson had filibuster proof majorities in the Senate. We need more Democrats in Congress, but the Main Stream Media effectively diminishes Democrats, and the Right Wing Media is disingenuous and fanatical in opposition to Democrats, while the far left and the nihilistic are also critical of Democrats. There is not much hope for corrective policies. Progressives have only been able to get their measures passed into law when the Democrats had filibuster proof majorities in the Senate.

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By eir, July 5, 2010 at 4:47 pm Link to this comment

You also need a Franklin Delano Roosevelt, who said “I ask you to judge me by the enemies I’ve made.”

Guess that’s why it took the majority of Americans with a memory of FDR to be dead before his enemies could really start to move on the hated Roosevelt.

Do the corporatists and oligarchs hate Obama?

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JDmysticDJ's avatar

By JDmysticDJ, July 5, 2010 at 1:48 pm Link to this comment

The mavens won’t listen to Krugman, and they won’t learn from the Roosevelt era. They will continue with their self serving ideology, further increasing the income disparity between the haves and the have nots. Their policies will be harmful to their own interests, but tragic for the rest of us.

Democrats will propose inadequate stimulus programs, but those stimulus programs will be filibustered in the Senate.

If the Republicans regain a majority position in Congress, the Democrats will submit to counter productive tax policies and austerity measures.

Roosevelt and Johnson had filibuster proof majorities in the Senate. We need more Democrats in Congress, but the Main Stream Media effectively diminishes Democrats, and the Right Wing Media is disingenuous and fanatical in opposition to Democrats, while the far left is also critical of Democrats. There is not much hope for sensible economic policies. Progressives have only been able to get their measures passed into law when the Democrats had filibuster proof majorities in the Senate.

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kerryrose's avatar

By kerryrose, July 5, 2010 at 9:13 am Link to this comment

Marcus:
Wait: there’s more. One main reason there aren’t enough jobs right now is weak consumer demand. Helping the unemployed, by putting money in the pockets of people who badly need it, helps support consumer spending. That’s why the Congressional Budget Office rates aid to the unemployed as a highly cost-effective form of economic stimulus. And unlike, say, large infrastructure projects, aid to the unemployed creates jobs quickly — while allowing that aid to lapse, which is what is happening right now, is a recipe for even weaker job growth, not in the distant future but over the next few months.

But won’t extending unemployment benefits worsen the budget deficit? Yes, slightly — but as I and others have been arguing at length, penny-pinching in the midst of a severely depressed economy is no way to deal with our long-run budget problems. And penny-pinching at the expense of the unemployed is cruel as well as misguided.

Paul Krugman

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By rudyspeaks1, July 5, 2010 at 8:45 am Link to this comment

What’s the point of this article? It asserts that long term debt is inevitable,
“Assum[ing] a realistic policy scenario—most of the Bush tax cuts continue”. Huh?
Any mention of why the obvious solution, Progressive income taxation, is not
“realistic”? “Eisenhower Tax Rates”, 91% on marginal income (over c. $3 million)
affecting only the class that is responsible for this Ponzi scheme plus a “Tobin
Tax” on toxic High Frequency Trades would raise billions and (in the case of the
Tobin Tax) suppress some of the useless, risky behavior that got us here. But… No
Mention from Ms. Marcus! No, the rich have lost trillions of bucks and the
Beltway’s paid scribes must earn their high salaries and “access” by concocting a
reality in which the poor must bleed their pennies to the architects of financial
ruin. No mention of alternatives (WHO pays) in this “ugly belt-tightening”, just the
panic-inducing warning, “How ugly will depend on how quickly policymakers
manage to act.” Why does this remind me of “Saddam’s WMD’s”?

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By John P. Teschke, July 5, 2010 at 8:07 am Link to this comment
(Unregistered commenter)

The fact is the depression is continuing. The only logical place to cut is the military. If they cut Social Security there wood also be unintended consequences such as increased difficulty collecting other taxes.

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By dihey, July 5, 2010 at 6:12 am Link to this comment

cmarcusparr: what makes you think that corporations “pay taxes”? Whenever they cannot avoid paying taxes they pass the buck to the consumer.

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By jrundin, July 4, 2010 at 10:22 pm Link to this comment

This is ugly right wing crap from within the Washington Bubble.

I’ll start worrying about the deficit as soon as the assholes in Washington stop spending trillions on pointless imperialist wars abroad.

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By cmarcusparr, July 4, 2010 at 8:41 pm Link to this comment

An intelligent way to balance the federal budget would be to force corporations, such as Exxon Mobil, to pay their far share of taxes. In 2008, Exxon paid ZERO taxes because their corporate headquarters are located in the Cayman Islands (along with about 1800 other formerly-American corporations). To add insult to injury, Exxon received ~$145 million in a tax rebate that same year.

It’s the transnational corporations that are controlling our government, destroying the environment, and impoverishing Americans. Take the country back. End the oligarchy.

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kerryrose's avatar

By kerryrose, July 4, 2010 at 8:23 pm Link to this comment

Maybe Marcus hasn’t read or doesn’t prescribe to the generally accepted non-right viewpoint that trying to tackle a deficit during a recession is not only unwise, it is stupid.

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By SteveL, July 4, 2010 at 8:09 pm Link to this comment

Same stupid crap that went on during the Great Depression.  History books must
be something Washington politicians cannot look at.

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G.Anderson's avatar

By G.Anderson, July 4, 2010 at 5:46 pm Link to this comment

With 46 states facing bankrupcy, 3 ongoing wars, personal bankrupcy heading to 2005 levels, the gulf disaster, unemployement rising, etc., don’t bet on this happening in 2011.

At this point I’m wondering how anyone can believe we have a functional government, able to do anything at all, except make trouble for working people.

Maybe, NAFTA, and CAFTA weren’t such a good idea after all.

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By Gary Maxwell, July 4, 2010 at 5:01 pm Link to this comment
(Unregistered commenter)

Balancing the budget is actually pretty easy.

1) eliminate all subsides.
2) return the to the pre-Reagan era tax structure.
3) reduce military spending by 50% (our spending would still equal the next biggest military budget in the world).
4) get out of Iraq and Afghanistan.
5) collect Social Security taxes on all income.
6) increase in the retirement age by one year for every ten that people have until retirement.

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By gerard, July 4, 2010 at 2:03 pm Link to this comment

How ugly will depend on who gets cut and who doesn’t.
Dollars to doughnuts those who get cut won’t be the Corp-ses.  They will continue right on, dancing in the financial graveyard that is burying so many of the rest of us.

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