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Orszag warns against slashing deficit too quickly

By Nicholas Johnston
(Bloomberg) -- Peter Orszag, giving his last speech as White House budget director on Wednesday, defended the administration's economic policies and said it would be "foolish" to try to slash the deficit before the recovery takes hold.

Orszag, who is leaving his post at the end of the week, said the measures taken to try to stem the worst recession in more than 70 years, including the $862 billion stimulus, helped boost U.S. economic growth and reduced job losses.

While the government must address the nation's long-term debt, "it would be foolish to dramatically reduce the deficit immediately" because that would choke off the recovery, Orszag said in an address at the Brookings Institution in Washington. "The right combination is more fiscal discipline in the medium- and long-term, and more support for the economy in the short term, and both sides need to acknowledge that."

The White House Office of Management and Budget said in a July 23 budget update that the federal deficit will be a record $1.47 trillion this year, or 10 percent of the gross domestic product, and $1.42 trillion next year.

Orszag said the administration has taken steps to deal with the deficit in coming years, including a three-year freeze on discretionary non-defense spending, cuts in unnecessary programs and an overhaul of the U.S. health-care system. The health-care plan, which President Obama signed into law in March, is crucial to deficit reduction because it will trim the rising costs for medical treatment, Orszag said.

The growing cost of health care is the "single greatest driver of our long-term deficits," he said.

Orszag said the recommendations from Obama's 18-member deficit commission also will be key to getting the budget under control. The commission, scheduled to give its report in December, is looking at ways to curb deficits to about 3 percent of the GDP by 2015, a level most economists say is sustainable.

By Bloomberg  |  July 28, 2010; 12:19 PM ET
Categories:  Budget and fiscal policy , U.S. Economy  
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Comments

Foolish? Yes. Deficit reduction. Foolish for the USA, Germany when it needed it and the biggest. A "total need" for smaller countries being comdemned to zero growth for long years. So clear. Monetary policy by itself is not enough to promote an enough quick recovery. This is what Mr. Bernanke is trying to hide, among others.

Posted by: Anonymous | July 28, 2010 1:53 PM | Report abuse

Orzag has the same problem as much of the offical bureacracy. That is believing there is some way for the economy to recover before it is fixed. There is no way the participants in the economy will make the difficult decisions needed to gain some kind of sustainable stability until the government's econcomic policies are normalized. Policy normalization has to come first. Given a decade or more's history of unsustainable government policies, even once the government policies have been normalized, it is going to take a lengthy time for the real economy to adjust to them and recover some relatively stable sustainable forward trend.

Posted by: dnjake | July 28, 2010 5:12 PM | Report abuse

We the people need to force the creation of a self-sustaining, debt free government.

We've done it before and should do it now.

Congress would simply create the money it needs on a printing press or with accounting entries, then spend this money directly into the economy, debt free. As per Article 1, Section 8 of our Constitution.

The usual objection to this is that it would be highly inflationary.

No So.

The money would be spent by the government as is the case now, on productive endeavors that increased the supply of goods and services – public transportation, low-cost housing, alternative energy development, a stonger defense system, a new national grid,rehabilitating our infrrastructure and the like – supply and demand would rise together and price inflation would not result.

The American colonial governments issued their own money (Scrip) all through the eighteenth century. It was this original funding scheme that was responsible for the remarkable abundance in the colonies, at a time when England was suffering the depression conditions of the Industrial Revolution.

After the American Revolution, private bankers got control of the money supply; but Abraham Lincoln, and Congress at the time, followed the colonial model and authorized government-issued Greenbacks during the Civil War. Not only did this allow the North to win the war without plunging it into debt to the bankers, but it funded a period of unprecedented expansion and productivity for the country. While inflation did raise it's ugly head, we have never had a war where inflation did not occur. Moreover, gold and proprietary currencies Created by private banks in the South and West) were also in circulation during the 19th century which added to inflationary pressures.

Financing a 21st century New Deal without putting the country further into insolvency would not represent a radical departure from tradition but would mean a return to our roots. We would be returning to the forgotten but successful monetary policy advocated by our venerable forebears Benjamin Franklin, Thomas Jefferson, Andrew Jackson and Abraham Lincoln.

Issuing this debt free currency would also allow the Congress to reduce individual and corporate income tax rates by up to 80%, further stimulating consumer credit and capital investment. This would be possible because national debt service would be cut to zero in the first and subsequent years of a shift to this alternative.

Moreover, national debt could be reduced significantly, by exchanging the New Dollar for Treasury paper held by creditors. That Treasury paper would then be liquidated rather than rolled over, as is currnt practice. Doing so eliminates any threat of inflation.

An $8 trillion public debt held in Treasury paper is replaced by $8 trillion in New Dollars. M3 is unchange, not increased.

Posted by: Anonymous | August 1, 2010 2:27 PM | Report abuse

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