Experts Blog: Fiscal Balance And Credibility


A crucial question is whether President Obama's policies will restore confidence in the government's commitment to taking politically unpopular steps to help the economy. Putting aside disputes about the effectiveness of one form or another of the stimulus legislation, does it bolster confidence for Obama to say that he can keep taxes low, maintain social benefits, and put the budget on a path toward fiscal balance? Even if he has no choice politically, is there a cost to the economy to maintain this posture? Are there economic benefits to taking this line, even if the facts suggest it will be impossible? -'s John Maggs

Gary Burtless, Chair in Economic Studies, Brookings Institution: I may have missed the memo in which the President promised he would keep everyone's taxes low, maintain social benefits, and put the budget on a path toward fiscal rectitude. Because the President obtained his office as a result of a political campaign that lasted nearly two years, it's likely he said a couple of things that can be interpreted as mutually inconsistent. Still, I don't think President Obama promised to keep taxes low for every taxpayer or said benefits would be fully preserved for every current and future recipient. In fact, I recall him campaigning to repeal or let lapse some tax cuts of the Bush Administration and to increase Social Security payroll taxes on high-wage workers. These proposed tax hikes will not eliminate the long-term budget imbalance, but they contradict the notion that the President entered office pledging to keep taxes low on everyone.

In the short run, there is a clear advantage to emphasizing fiscal stimulus rather than long-term fiscal restraint. In an era of historically low yields on short-term Treasury debt, the Federal Reserve has less scope for using monetary policy to engineer a recovery from the recession. This increases the pressure on Congress and the President to boost aggregate demand through fiscal expansion. If the policy tools of the Federal Reserve are less potent in the current recession than they were in earlier recessions, we will have to rely on other policy tools. The most potent of these is stimulative fiscal policy.

As the nation recovers from recession it will be increasingly important to assure investors that the government's long-term budget is on a sustainable path. The component of the budget that makes this unbelievable is the health care budget - - expenditures on Medicare, medicaid, veterans' and government employee health benefits. The expected growth of spending on these items represents an overwhelming fraction of the federal government's future budget problem. If public and private spending on health care were subject to rational restraints, the nation's long-term budget problem would disappear or seem manageable. For that reason, reform of health insurance and of the health care system more generally is the first order of business for ensuring that the future federal budget will be both sustainable and affordable. As I recall the recent campaign, candidate Barack Obama stressed repeatedly the importance of reigning in health care costs. If the President and Congress succeed in doing this, their efforts will go a long way toward fixing the nation's long-term budget problem.

Jeffrey Frankel, Professor of Capital Formation and Growth, Harvard University: The trick is to combine substantial effective short-run fiscal stimulus in 2009 and, probably, 2010, with a return to fiscal sustainability in the longer run -- and preferably not to wait until the long run has arrived to put in place specific measures that will move operate in this direction. The motivation is not just to try to prevent a fiscal disaster five or ten years from now (with dollar crash), but also to make sure that an incipient recovery (say, a year from now) is not aborted by a rapid rise in long term real interest rates. Only by beginning relatively soon to restore some degree of long-run fiscal credibility can we keep long term interest rates as low as they are today.

One concrete example of the sort of desired policy measures: The government should commit now to let the Bush tax-cuts-for-the-rich, such as the abolition of the estate tax, expire on schedule in 2011. Another example: President Obama's commitment to address global climate change and other environmental matters should be embodied in a formula: "Spend green now, tax green in the future." Today's tax cuts -- especially for low-income workers (elimination of payroll tax for the lowest income Americans, refundable per-child tax credit, expansion of the EITC) and the middle class (fix the AMT) -- should be offset by legislation that would raise energy taxes in the longer run. And of course the current increase in spending should meet the twin goals of cost-effectiveness and well-targeted for stimulating demand in the present. For the longer-run a very small increase in the retirement age plus a move to progressive indexation of social security benefits would go a long way to meeting the huge future deficits associated with the retirement of the baby boom generation. Another good idea would be eventually to bring back the spending caps and PAYGO provisions that Presidents G. H. W. Bush and Bill Clinton used effectively to eliminate deficits during the course of the 1990s. Of course none of these measures would be popular politically -- least of all the energy taxes. But I believe the electorate understands that we are in a state of emergency (especially economic, but also with respect to foreign policy and the global environment), and is willing to make necessary sacrifices if President Obama calls on it to do so.

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Cyra Master

Cyra Master is a W.E.B. Du Bois fellow at the Atlantic. Previously, she was an editor at the nonprofit Center for Law and Social Policy and was a reporter for the New Hampshire Eagle Tribune. She is a graduate of Emerson College.
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