How Obama could prevent a second recession

August 24, 2009

Is the light at the end of the tunnel an oncoming train? That’s the worry of many economists who fret that after a couple of quarters of moderate growth, the U.S. economy will either lapse into a state of torpor or relapse into recession. In a new Financial Times op-ed, Nouriel Roubini says that weak labor markets, weak banks, weak consumers, weak profits and weak trade creates a strong risk of just such a “W-shaped” economic scenario.

If so, unemployment would remain really high. And, given that prospect, you just know incumbent Democrats facing re-election in 2010 would love to vote for Son of Stimulus. The big drawback: Doing so would risk the wrath of budget-conscious independents, as well as bond investors who share Warren Buffett’s stated concerns that all this red ink could sink the dollar.  Plus, a backup in interest rates would negate any positive effects from more stimulus.

But Olivier Blanchard, chief economist at the International Monetary Fund, may have cracked the code on to boost the economy and not spook bond investors and budget hawks. Blanchard’s grand bargain, one I have been suggesting for months, is for government to spend more money in the short term to boost growth while simultaneously taking strong action to reduce the long-term budget deficit. “The trade-off is fairly attractive,” Blanchard said in a report this week. “IMF estimates suggest that the fiscal cost of future increases in entitlements is 10 times the fiscal cost of the crisis. Thus, even a modest cut in the growth rate of entitlement programs can buy substantial fiscal space for continuing stimulus.”

Fiscal space is good! When you’re dealing with gobsmacking budget numbers, small cuts (or even just nicks in the rate of growth) can make a huge, real-world difference. As the Peterson Foundation figures it, Uncle Sam has run up some $55 trillion in long-term liabilities. Minor tweaks that make that number a bit more manageable in the future would create huge fiscal opportunities for more pro-growth measures today.

One example: the Dartmouth Institute for Health Policy and Clinical Practice calculates that if Medicare spending across America “grew at the San Francisco rate of 2.4 percent per year instead of the current national average (3.5 percent), Medicare would achieve a cumulative savings of $1.42 trillion between now and 2023.” That’s a nice chunk of change. Or, as an analysis I commissioned from the American Enterprise Institute revealed, extending the Social Security retirement age while at the same time indexing benefits to inflation rather than wages would turn a $5 trillion present value deficit into a $5 trillion surplus.

Can America afford to upgrade its rotting transportation infrastructure and electrical grid while also, say, lowering corporate and investment tax rates to a more internationally competitive level? Yes and yes. If entitlement liabilities are downscaled, the U.S economy can generate more than enough future economic growth and excess tax revenue tomorrow to “pay for” smart investments today. That would create jobs and strengthen America’s economic foundation -– and keep the bond vigilantes at bay.


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You would have a revolution on your hands if you suggest removing hard earned and paid into benefits by the baby boom generation (including me). I would march on DC to see to it that I get every $ of FICA and medicare due me!

Posted by alan | Report as abusive

Mischaracterized economic downturn sir. this will be the second leg of a depression-level downturn. Our consumer driven economy (67%) will not return. Recession implies a downturn in a continuous model. Depression implies the end of one model and painful restructuring into a new model. The debt load of the US govt. in untenable in the long-term and that is already known in many quarters.

Our political structure and societal values are not prepared to take the required steps to prevent disaster which will come in the bond market. The budget cuts, tax hikes and restructuring will only come after the disaster.

Posted by fred | Report as abusive

I think the root of our economic malaise is that for the longest time we convinced the rest of the world that it was their job to produce and our’s to consume. Well, you can’t fool the rest of the world all the time and they might be starting to think that they are getting the short end of the stick.

Posted by Bezukhov | Report as abusive

I am always amazed how the “conservatives” propose giving more money to those who already have too much at the expense of those how don’t have enough.

Perhaps a good campaign slogan would be “Taking the sting out of being rich in America, Vote “.

Posted by Joe | Report as abusive

Interesting how the first comment bears out the truth of the second comment. Alan, the baby boomer feels entitled to his FICA and medicare. Fred points out that we (‘our societal values’) are not prepared to take the required steps.

I think the baby boomers worried for the last twenty years that social security was not really an insurance program but a tax in disguise, so Alan at least must have been warned that he shouldn’t expect a life of ease just because he’s worked hard. (At how many times in the history of the world was there such an easy correlation between working hard and right to spend the last twenty plus years playing golf and shopping in Europe.)

Yet regardless of all that hand-wringing, the baby boomers kept on electing idiots to run the country, or decided to concentrate on their precious careers and self esteem instead of engaging in civics. Now their political immaturity has come back to haunt them. Sorry, but it’s too late to march on Washington.

The baby boomers sold out, starting with the Reagan era of institutionalizing The Big Lie method of governance, up to the time when Cheney was cannibalizing the constitution. It’s sad to think that the most highly educated work force yet seen in the history of the world opted for a lifestyle of conspicuous consumption and narcissism over wisdom and moderation, but that’s the way it went down.

Just think, the baby boomers could have remained politically active (while growing up from the drug use of their hippy days) AND engaged in the productive, creative work that created incredible wealth. But instead, all that wealth was squandered on over-sized cars and energy-wasting houses spread across socially sterile suburbs. And now they want to protest.

After the march on DC, don’t forget to get a massage.

How about this: Instead of feeling entitled and betrayed, why not try to give back to the society that allowed you to become so successful. Go out and invent green products or systems that can get this country out from the clutches of the Saudi royal family. Or at least invest in a company that is searching for solutions. Please note that all that coal smoke from China is going to blow over the Pacific and ruin your fun here. You’ll have to wear oxygen masks on the golf course. Might as well stay in inside and study up on how to make a difference.

Having said that, I want to add that if the US is able to reinvigorate, it will be because the baby boomers do something more useful than grab for what they feel is theirs.

Posted by stephen | Report as abusive

See you at the burning….

Posted by alan | Report as abusive

Way to flog that straw man, Stephen! That’s the way, invent a boogieman, assign him attributes, then give it to him good! It’s THEIR fault! Blame THEM! Use a really wide brush and spread the tar thick!

You should have worked for Dr. Goebbels…

Posted by edward | Report as abusive

The Boomers will simply be the first generation for whom the political promises weren’t kept in an unsustainable defined benefits program. The boomers labored their entire lives under a 15% earning payroll tax, to pay the benefits for a generation that labored under a 6% payroll tax. The demographics don’t support this model in perpetuity. It makes no sense at all that, as the Boomers leave the near or at peak period of their income earning and tax paying years, — that is, paying in the largest demographic subsidy into these programs– these ‘pay as you go’ defined benefit programs are already broke! It is exactly government inflation of our economies– a hidden tax — that has made this even possible at all. With an extra 30 million in the deongraphic, at or near its peak subsidy level, it makes no sense at all that these programs are already broke!

This one is easy, if not painless. Convert these programs to ‘defined contribution’ plans. Paint the old ‘defined benefit’ plans as a one time, well deserved ‘thank-you’ to the Greatest Generation, whose generational pain was all front-end loaded, and whose sacrifices created all the free world economies which followed.

This means, significantly reduced benefits from those pipe-dreams that are criminally advertised in advance by the SSA for the Boomers, and the Boomers generational pain will be back-end loaded. (And, why not? Did we think we were going to miss out on that?) It also means that their fewer kids will not be asked to labor under any greater a FICA/MEDI overburden then they did. The history of this is a political nightmare — 2%, then 6%, and then the Boomers 15% of earnings, taxed away to keep all the political promises flying. It’s insane. Cap it at the current 15%, don’t touch it, and restrict benefits to revenue, period, in this ‘pay as you go’ program. If a generation wants more benefits from the program, then it must do what the Greatest Generation did — have more kids, feed them, bandage their skinned knees, send them to school, actually create those future economies — and not what the Boomers did , which was, buy the second Bass boat and vacation home. That defines generational fairness, a defined contribution ‘safety-net’, not an unfulfillable promise to endlessly grow benefits…

Posted by Frediano | Report as abusive

edward – stephen is right and you are obviously either a ‘greedy geezer’ or a pinko commie. Either way, the narcistic ways of those 45-95 in this country have left us under 45 and our kids to pay for their hedonistic endeavors of the last 40+ years and are complaining that they may have to actually show some sacrifice themselves! Hippies and the ‘greatest generation’ were not an all volunteer military going on 8 years of continuous wars – we are. But we’ll fight the fight that these cowards had to be drafted to do, and take the 21st century GI Bill as it is – 1/2 of what the greedy geezers gave themselves post WW2 (look into it, dumb-dumb and you’ll see you the real propagandist is!). At the end of the day, all of the nation’s good over the last 30+ years has been off the back’s of those born post 1965 and all of it’s ailments have come from the self entitled, aged, hippy, commie jerks who should have been sent over the way to their blessed Red states (small s on purpose…) like Cuba (for it’s universal healthcare), China (for it’s great gun control) or Russia (which Putin is clearly reverting back to the old ways. Then maybe they could start to be some restoration to our once great country. Otherwise, all true patriots will have to wait for you old nut jobs to die off and stop voting yourself more and more entitlements at the cost Weimar Republic inflation. In other words edward, you and your ilk are idiots and only worth worm food, at best.

Posted by ross | Report as abusive

“Warren Buffett’s stated concerns that all this red ink could sink the dollar”

The U.S. hasn’t had a trade balance since 1975. A “sinking dollar” is the ONLY thing that will make the U.S. competitive with the world. Everything else is a charade to avoid admitting this.

Posted by D Sakarya | Report as abusive

Before you pay for infrastructure, get the economic house in order.

Clean up WALL STREET, then recovery can begin but will take a decade.

There is a culture of omnipotence that has been very pervasive throughout all of Wall Street’s major firms during the past two decades. It has also been very destructive.

America needs to clean house before a serious recovery can begin, and confidence reinstated. ca-end-your-fear-of-wall-street.html

Posted by James Raider | Report as abusive

@ D Sakarya,
“… Everything else is a charade to avoid admitting this.”

Absolutely. The denials going on and not being “called” by the MSM are astounding.

Posted by James Raider | Report as abusive

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