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The message

By Ezra Klein

Brad DeLong wonders if President Obama can discover some message discipline:

The message is PAYGO. Any proposal that does not pay for itself over the next ten years--any proposal projected to increase the debt relative to baseline as of 2020, and not to reduce the debt thereafter--gets vetoed.

Can he get on and stay on message?

By Ezra Klein  | November 3, 2010; 2:45 PM ET
 
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Comments

So then how would he deal with extending the Bush tax cuts?

Posted by: Asimov | November 3, 2010 2:51 PM | Report abuse

after election, Fed drops a few dimes. Probably appropriate, although they've spent plenty of time dithering.

Posted by: bdballard | November 3, 2010 2:53 PM | Report abuse

Seems to conflict with the 'if you make under $250,000 I won't raise your taxes' message, doesn't it?

Posted by: justin84 | November 3, 2010 3:09 PM | Report abuse

Key here is the 10-year window. We're going to need some fiscal policy to get us out of the hole we're in. Repeat after me: TEMPORARY. T E M P O R A R Y.

Posted by: gobaers | November 3, 2010 3:17 PM | Report abuse

So having spent 2 years passing or supporting unfunded and mostly unpopular stimulus measures, bank bailouts and auto bailouts, you now want Obama to get tough on this issue? By vetoing middle-class tax cuts?

Somehow I can't see that "message" going down well.

Posted by: bigmandave | November 3, 2010 3:23 PM | Report abuse

Well that would certainly have stopped the health care reform and saved a lot of seats if that was the policy a year ago, wouldn't it?

Posted by: 54465446 | November 3, 2010 3:39 PM | Report abuse

The Republican message of "Cutgo" which would require Congress to cut spending for a program of equal or greater value before approving a new program will play better.

http://voices.washingtonpost.com/ezra-klein/2010/11/which_party_is_better_on_the_d.html#more

Posted by: jnc4p | November 3, 2010 3:42 PM | Report abuse

Stimulus measures are by definition unfunded. Last I checked, government bonds are at historic lows, so if the government can help create demand (by, say, helping the states keep their police/fire/teachers) at these low interest rates, it's a good idea. Hell, you might even call it an investment.

In short, Higher growth from stimulus ->
Higher future tax receipts ->
Return to 'normal' tax rates + growing economy = Smaller Deficit

Unpopular as they were, the bank bailout was successful in stabilizing the financial sector. The government is going to take a loss on the auto-bailout, but considering the ultimate cost (I've seen figures of $17B) it's probably a net plus due to the jobs it saved.

Fannie and Freddie are the ones that will cost the government big bucks. Yet, here too, the stabilized housing market will probably have been worth the ~$150B projected cost.

Frankly, I'm not as interested in the politics as getting to a stable economy. With politics as they are currently laid out, we're probably not going to get out of this mess this decade. Pretty depressing stuff.

Posted by: gobaers | November 3, 2010 4:02 PM | Report abuse

More and more economists are calling for additional stimulus to jump start the economy. Corporations are sitting on cash waiting for an increase in consumer demand. In the short term government spending is more important than balancing the budget. Only when the economy returns to strong growth will it be time to cut spending.

Meanwhile the Democrats had better wake up and start debunking Republican whoppers - like the claim that tax cuts pay for themselves, something that even Bush's top economic advisers repudiated.

Posted by: BernieO | November 3, 2010 4:37 PM | Report abuse

It does kind of box him in if he wants to do stimulus. On the other hand, whenever anyone like the genius commenter with the genius username "54465446" pipes up with OBAMACARE WILL BANKRUPT US!!!! Obama can calmly and patiently explain how HCR actually lowers the deficit.

Posted by: randrewm | November 3, 2010 5:00 PM | Report abuse

"More and more economists are calling for additional stimulus to jump start the economy."

The $800 billion ARRA and QE1 only managed to get final sales growing at slightly *below* the pace we saw during the 2001 *recession*. What is an additional $50 or $100 billion going to do? And what happens when it ends? Are there no multipliers when spending is cut (stimulus ends)?

"Corporations are sitting on cash waiting for an increase in consumer demand."

Corporations are sitting in money market funds (i.e. they are lending to the government to help pay for the stimulus).

That's the problem with stimulus. Whenever the government borrows a huge pile of money, some other entity will be sitting on a huge pile of "cash" (the finance term for being in money market funds). If corporations sell their treasuries and start spending, then either households or foreign countries will have to buy them and they will be the horrible ones sitting on cash.

Also, looking at the asset side of the balance sheet provides an incomplete analysis - corporations are also 'sitting' on debt.

"Only when the economy returns to strong growth will it be time to cut spending."

Or, of course, we are put into a crisis like Greece. There is no benevolent EU to bail us out. We will have to cut spenidng then, too.

In the Depression of 1920, President Harding (who took over at roughly the same time as Obama, about one year in, 1921 for Harding) cut taxes and spending, run a budget surplus throughout. Real interest rates were extremely high, given rapid deflation. Unemployment averaged 8.7% or 11.7% in 1921 (depending on source), and was down to 4.8% or 2.4% (again, depending on source).

http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321

Unemployment averaged 9.3% in 2009. Any bets on it averaging as low as 4.8% (or even 7.8%) for 2011?

Posted by: justin84 | November 3, 2010 5:06 PM | Report abuse

"It does kind of box him in if he wants to do stimulus. On the other hand, whenever anyone like the genius commenter with the genius username "54465446" pipes up with OBAMACARE WILL BANKRUPT US!!!! Obama can calmly and patiently explain how HCR actually lowers the deficit."

54465446 only claims that Obamacare increases the deficit, and while long term forecasts are highly uncertain, it is a reasonable claim.

http://www.ncpa.org/pdfs/health-care-reform-likely-to-add-billions-to-deficit.pdf

Obamacare on its own won't bankrupt us.

Of course, a 65in LED TV probably won't be the purchase that bankrupts the guy spending $8,000/mo on a $6,000/mo salary, either. He's already heading for bankruptcy. The TV just pushes the needle a little bit further in the wrong direction.

Posted by: justin84 | November 3, 2010 5:19 PM | Report abuse

That would mean the end of the Bush tax cuts and the end of the wars. Won't happen, unfortunately.

Posted by: Hopeful9 | November 3, 2010 5:28 PM | Report abuse

justin84: "...a crisis like Greece. There is no benevolent EU to bail us out. We will have to cut spending then, too."

That's an interesting point. Since the EU and US are essentially equivalent federal governments, the crisis in Greece would be like a crisis in California (actually, a far smaller state -- perhaps Nebraska -- would be a better match in area and population). Effectively, when in trouble both the US and EU -- the two federal powers -- have to turn to each other or to China or to private investors for assistance.

The analogy suggests an increased need to return to federalism: by allowing each sovereign state to control its own fisc, many economic problems can be fire-walled: when the central government grows too large (as it has now), there really is no place to turn for help. That's one reason why I hope today is the first day of the Third Industrial Revolution, marking a return to the principles of federalism and limited government.

Posted by: rmgregory | November 3, 2010 5:31 PM | Report abuse

'Stimulus measures are by definition unfunded. Last I checked, government bonds are at historic lows, so if the government can help create demand (by, say, helping the states keep their police/fire/teachers) at these low interest rates, it's a good idea. Hell, you might even call it an investment.'


You might call it a union payoff, actually. The sky isn't going to fall just because we lay off a few hundred thousand teachers, and its much cheaper to pay their unemployment than it is to pay their bloated benefits, salaries, and pensions.


Course, that's the problem with the utter silliness of this 'message'. In the year before paygo was passed by the Democrats, the deficit in FY2007 was something around $200 billion. Today it is $1400 billion. Whoops.

Posted by: krazen1211 | November 3, 2010 6:42 PM | Report abuse

It doesn't matter if the stimulus and bailouts were successful or not. The point is Obama passed a raft of major measures that didn't obey PAYGO (in fact the purpose of the stimulus was to flout PAYGO). And they were mostly unpopular. If he takes Brad DeLong's advice and now starts vetoing anything that adds a dime to the deficit it's going to look mighty hypocritical. It certainly won't send a superb political message, as DeLong somehow thinks it will.

Posted by: bigmandave | November 3, 2010 8:47 PM | Report abuse

randrewm wrote:

"Obama can calmly and patiently explain how HCR actually lowers the deficit."

Except that it doesn't, but I'm all ears if you explain to me where I'm wrong.

I ask only that you don't use the magical incantation "waste fraud and abuse".

Posted by: 54465446 | November 3, 2010 11:38 PM | Report abuse

justin84:

Thanks for the backup.

Unfortunately you and I live in a world of non-governmental accouting, so we expect that the numbers will add up. Though you are 100% right as usual, most people here when cornered will say that the numbers don't matter, or that we never expected them to be right any way.

I DO love the line that "stimulus measures are by definition unfunded" though. No, they're funded by printing money, borrowing from yourself essentially because you have the legal power to create currency.

These are the same people who say that TARP was repaid. No, what happened was the government took securities that have since greatly diminished in value in return for loaning money at zero percent interest to institutions who then loaned it back to the government at 2-3% interest, whereby that money was used to pay back the government.

I wish someone would allow me to pay off my mortgage with a system like that.

Posted by: 54465446 | November 3, 2010 11:58 PM | Report abuse

randrewm:

Forgot to say that you have never seen me use the words bankrupt us on any thread at any time.

As long as the Fed is committed to ultimately lowering the deficit by printing money, AND as long as we can either convince the Chinese and others to buy our debt, OR as in QE2, buy the debt ourselves, bankruptcy has never been a remote possibility.

However if I were you, and I wanted to insure my future comfort, I would be buying commodities, every time there is a reasonable price dip for the foreseeable future.

I would also short some other nations' currencies against the dollar, because we're in a worldwide race to see who can debase their currency the fastest. We're winning right now, so expect that the other nations will be running hard to catch up.

I only say this because I want you to be financially viable in 2014. I want you to be able to tell me how wrong I was from the comfort of your beachfront condo.

Posted by: 54465446 | November 4, 2010 12:12 AM | Report abuse

"I DO love the line that "stimulus measures are by definition unfunded" though. No, they're funded by printing money, borrowing from yourself essentially because you have the legal power to create currency."

'Unfunded' here means not balanced by spending cuts, in the context of PAYGO.

If you cut spending in government enough to offset stimulus spending, then it's not stimulus at all, just a redistribution of existing spending. Stimulus by definition is borrowing, in the form of government bonds, to spend now.

For econ gearheads, the government expenditure multiplier is 1. This means that if you tax-and-spend, even in the ideal, you're not going increase GDP at all. Stimulus' goal is to increase GDP by creating demand through fiscal policy.

So yes, any stimulus bill, by definition, will not follow PAYGO in the present. If you make allowances within a longer horizon, though, you can make it balance.

Posted by: gobaers | November 4, 2010 4:39 PM | Report abuse

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