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Scot Lehigh

Obama's Olympian feat on the economy

By Scot Lehigh
February 27, 2009
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IF PRESIDENT Obama were an Olympic diver, the degree of difficulty in what he's trying to do would be off the charts.

He's attempting to jump-start the economy, fix the banking system, address the mortgage crisis, reform healthcare, save the automobile industry, catalyze a new green energy sector, invest more in education, and establish a cap-and-trade system to fight climate change.

Oh yes, and start to tackle the nation's yawning fiscal deficit.

Casual observers of politics can be forgiven if they are confused, for the new administration's economic message seems to translate to this: Hard times are upon us, so we need to loosen our belt. But when the recovery comes, it will be time to suck in our gut and cinch things up again.

That no doubt seems counterintuitive to many. And yet, there's an economic method to the two-step approach.

Start with the belt-loosening. With the traditional generators of economic activity anemic, the government is really all that's left to inject some demand into the economy.

The president and his team, who believe government can spark lasting private-sector activity, are betting heavily its stimulus plan will work. Most congressional Republicans, who doubt the economic efficacy of government, have wagered with their votes that it won't.

Thus, if Obama gets what he wants, we'll witness a real-time economic experiment. If the president proves right, Democrats should do well in the next few elections. If Republicans are correct, voters may well punish the party in power and reward the minority.

To move forward the way it hopes, the administration clearly needs more revenue, much of which the president plans to corral by letting tax cuts expire for upper-earners while raising their capital gains rate and limiting the tax benefit they can secure by itemizing.

Those proposals will raise cries of socialism from those confused about what socialism actually is. Still, it's certainly true that those moves would put more of the tax burden on those who own more of the country's wealth.

Conservatives, of course, will predict that if tax rates rise, the sky will fall. Given that higher rates didn't doom the economy during the Clinton years, there's every reason to be skeptical that capitalism is really that fragile.

But that too will be tested in this administration's liberal experiment.

In his presentation this week at the White House's fiscal responsibility summit, Robert Greenstein, executive director of the Center on Budget and Policy Priorities, offered some valuable perspective on the nation's budgetary problems. Over the last 30 years, federal revenues have averaged about 18.4 percent of GDP. But the only years we've balanced the budget during that period - 1998 to 2001 - were when revenues totaled between 20 and 21 percent of GDP.

Even if Obama gets the new monies he hopes for, revenues for the next decade will only gradually grow to 19.5 percent of GDP, while expenditures won't dip below 22 percent.

That will make the pivot toward deficit reduction difficult. The president has pledged to cut the deficit, which will be some $1.75 trillion this year, to $533 billion by the end of his first term. Nevertheless, the administration still projects it rising to $712 billion in 2019.

That would be 3.1 percent of GDP, which outstrips the average annual economic growth of recent decades. Thus, even after a decade, federal debt will probably still be increasing relative to GDP.

"It shows what a huge problem we've got," says Robert Bixby, executive director of the Concord Coalition, who thinks the potential is there for the deficit to remain considerably higher.

Given fiscal reality, Obama's plan for permanent new tax cuts for businesses and for families making up to about $190,000 a year seems overly generous.

Justified as an offset to higher energy costs that will result from the cap-and-trade system, the middle-class tax break will obviously be popular. Yet at a combined price tag of about $100 billion a year, those tax benefits add yet another tricky twist.

And the Olympian feat the president hopes to pull off is difficult enough already.

Scot Lehigh can be reached at lehigh@globe.com.

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