Tuesday, November 4, 2008

The next President needs to err on the side of fiscal responsibility

The new President is going to have a lot of short-term problems to tackle. But longer term, fiscal responsibility should be at the top of the list.

  1. The 2009 baseline budget is projected to be -$438 billion, which doesn't include the Emergency Stabilization Act of 2008 (includes TARP plus a slew of new spending).
  2. U.S. debt ($10.6 trillion) is now 73% of U.S. Gross Domestic Product.

Is it possible that Congress can actually save in the future to pay for today's stimulus packages? Mark Thoma doubts that "the current crisis will change our attitude about paying for stabilization policy, i.e. if it will make us more willing to raise taxes and cut spending when times are good." (This is a nice post, and worth a read).

The one thing that the next President needs to do is to promote fiscal responsibility when the economy emerges from this recession (and it will) by capping spending and paying for the debt-financed stimulus spending and financial relief programs. Mark Thoma suggests adding stipulations to the debt-financed spending bills requiring repayment after the economy stabilizes. This would be nice if I believed that Congress - any Congress - was able to err on the side of fiscal responsibility.

Congress won't, so it may just work better if either the stimulus packages were designed specifically to promote long-run productivity with economic gains (a.k.a., no further rebate programs), or there was no second stimulus package and we relied solely on automatic stabilizers. At any rate, I agree with Brian S. Wesbury and Bob Stein senior from First Trust Advisors, who write Wanted: A Non-Keynsian President in Forbes since, as you all know, I am more worried about inflation rather than deflation:

"We are concerned that whoever wins Tuesday's presidential election, they will attempt to use this same short-term, Keynesian-type stimulus. Sen. McCain has argued for $300 billion in short-term spending to help people with troubled mortgages. Sen. Obama has signaled his support for House Speaker Pelosi's quest for yet another short-term stimulus package. The Speaker's plan is focused on a combination of tax rebates, extended jobless benefits, expanded food stamps, aid to state spenders and infrastructure.

There is nothing wrong with boosting infrastructure spending, where needed. But that policy change should be directed at efficiently meeting long-term building goals, not just timed to boost the economy when policymakers think it needs boosting.

As a whole, another short-term stimulus will just leave the U.S. deeper in debt with no change in the incentive to work, save or invest, meaning workers and investors have to pay higher taxes in the future. If the new president wants to quickly send a positive message to the markets, he should announce that the era of short-term management of fiscal policy is over.

The model to follow would be President Reagan in early 1981. Soon after taking office, President Reagan met with Federal Reserve Chairman Paul Volcker at the White House. The message was clear: The White House was giving the Fed carte blanche to bring down inflation. If the economy needed a stimulus, it would come from lower tax rates, not lower interest rates.

While previous presidents of both parties--LBJ, Nixon and Carter--saw monetary policy as a way to boost the economy in the short term, Reagan knew that the economy's long-term health required stable prices. We're hoping that no matter what has been said on the campaign trail this year, the next president realizes it's time to focus on the government's long-term fiscal health. This means keeping burdens on entrepreneurs at a minimum, while fighting as hard as possible to keep prices stable.""

Rebecca Wilder


  1. I wish! Tomorrow, we will start on the next 2-year election cycle with all the Congress voting to do whatever they can to make us vote for them. That is long term thinking according to politicians.

  2. It's going to be a fine line that the next president will have to tread upon. I read an article on MarketWatch today that commented, despite tonight's result, 50% of the nation will be upset tomorrow -- either Obama or McCain supporters will walk away disappointed. It will be the same regarding the nation's reaction to economic policy. No matter what action, or inaction, is taken, it will seem wrong in the eyes of many.

    But I do agree with you, long-term policy must be dealt with, despite the outcries for a quick fix.

    Nice post,

  3. There could be many people out there who are ambivalent about the Obama election and just resigned. McCain blew his campaign from the start and was not the first choice of many. Obama also has his detractors in his own party. I am taking a wait-and-see attitude as there is nothing that can be done except write your (new) Congressman or Senator.