Marketplace Scratch Pad

Pay as you go broke

Scott Jagow Feb 5, 2010

Both the House and the Senate have passed new “pay as you go” rules. PAYGO requires any new spending measures to be offset by cuts elsewhere or by tax increases. At the same time, the House has voted to raise the debt ceiling almost $2 trillion to $14.3 trillion. That’s about $46,000 worth of debt per American.

These are purely moves by President Obama and the Democrats. Not a single Republican voted for either measure. Seemingly, the message the Democrats are trying to send is that there’s still a need to “spend up” the economy but that long-term deficits will kill us.

Republicans claim PAYGO will become an excuse for tax increases because nobody likes to cut spending. And to them, raising the debt ceiling is fiscal irresponsibility at its worse.

So that’s where we are. Let’s get some thoughts on this. Economist Paul Krugman says short-term deficits are nothing to worry about:

…there’s no reason to panic about budget prospects for the next few years, or even for the next decade. Consider, for example, what the latest budget proposal from the Obama administration says about interest payments on federal debt; according to the projections, a decade from now they’ll have risen to 3.5 percent of G.D.P. How scary is that? It’s about the same as interest costs under the first President Bush…

For the fact is that thanks to deficit hysteria, Washington now has its priorities all wrong: all the talk is about how to shave a few billion dollars off government spending, while there’s hardly any willingness to tackle mass unemployment. Policy is headed in the wrong direction — and millions of Americans will pay the price.

Diane Lim Rogers, chief economist for the Concord Coalition, a nonpartisan deficit watchdog group, says:

I don’t like that the administration and congressional versions of pay-go exempt most of the Bush tax cuts, AMT relief, and the Medicare “doc fix.” I don’t understand how the administration can simultaneously blame the Bush tax cuts for the deficits they inherited and propose continuing them as the single most costly deficit-financed item in their own budget.

From the Economist:

In the medium term there are only two ways to bring the deficit back to a sustainable level–which means no more than 3% of GDP. Either taxes will have to rise, or a serious attempt must be made to rein in the entitlements–legally mandated programmes such as Medicare, Medicaid and Social Security–that constitute the great bulk of spending. Mr Obama is proposing only a bit of the first, and none of the second. Taxes on the rich (those earning $250,000 a year or more) will go up from next January, as the Bush tax cuts expire; but Mr Obama had promised middle America that it will pay “not one single dime” more in tax, and so he is extending George Bush’s budget-busting tax cuts for the remaining 98% of Americans.

From Investor’s Business Daily:

The U.S. will spend close to $45 trillion over the next decade — roughly the amount of money we spent on all the budgets from 1789 to 2006 combined. This is fiscal insanity. Spending must be cut.

A steep market dive on Thursday was blamed on turmoil in Europe. Why? Nations like Greece, Portugal and Spain let their debt reach unsustainable levels, killing economic growth, boosting joblessness and leading to violence and strikes. Consider it a warning.

Such a fate lies in America’s future unless we act — and soon — to rein in runaway spending and return control of the economy to the private sector. If we don’t, default and economic ruin await.

From the Washington Post:

Obama should heed the error committed by Franklin D. Roosevelt. Convinced that the Depression was effectively over and anxious to head off inflation, FDR sought a balanced budget in 1937. However, the premature removal of fiscal stimulus choked off the recovery and sent the economy into renewed recession, from which it only emerged in World War II.

Conversely, if Obama changes course too late, he will lack political credibility as a deficit hawk — like George W. Bush, who became a born-again budget balancer only when facing a Democratic Congress in 2007.

I’d love to hear your two cents on this…

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