Thursday, January 8, 2009

Big Stimulus, Small Savings. Obama’s “American Recovery and Reinvestment Plan.”

Upon taking office, President-elect Obama hopes to sign a big stimulus package as soon as possible, The amount under consideration is in the neighborhood of $800 billion or so over the next two years, consisting of a mixture of tax cuts and spending measures. The federal budget deficit for the current fiscal year (October 1, 2008-September 30, 2009) is currently estimated at $1.2 trillion. Adding Obama’s stimulus package and perhaps some congressional add-ons could increase the deficit to as much as $2 trillion. Depending on the length and severity of the recession, the deficit could exceed $1 trillion in the next fiscal year. Forecasting deficits over the next few years will be a tricky business, a combination of science, art, and luck.

Obama has also stated his desire to begin the process of bringing long-term deficits under control. To that end he has established a new office in the White House, Chief Performance Officer, filling it with Nancy Killefer, a high profile appointment. He has also encouraged his head of the Office of Management and Budget, Peter Orszag, to comb through the federal budget line-by-line to get rid of inefficient and bloated programs. He has promised that the stimulus package will not include any earmarks: “Read my lips. No earmarks.”

Giving Obama the benefit of the doubt, assume he keeps earmarks out of the stimulus. Depending on the precise definition of an earmark, the savings amount to $20-30 billion, a large sum of money. But it pales against a $2 trillion deficit, offsetting a mere 1-1.5% of the additional borrowing the deficit requires.

How Obama will bring long-term deficits under control will likely to have to wait until 2010 or 2011, when, hopefully, the stimulus succeeds in ending the recession and restoring growth.

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