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Obama team crafts ways to ‘jolt’ economy

- The Washington Times - Tuesday, November 25, 2008

CHICAGO

President-elect Barack Obama's campaign promise to cut spending has been waylaid by the reality of the economy, and he warned Monday that the deficit is going to grow and spending cuts will have to take a back seat now to stimulating the economy.

He also signaled he may forgo immediate tax increases on high-income families and instead wait for the Bush tax cuts to expire.

"We're going to see a substantial deficit next year, bigger than we've seen in a very long time," Mr. Obama said in his second news conference since winning the election. "I think American taxpayers are understandably concerned: If we already have a big deficit, and now we're adding an additional stimulus, how are we going to pay for all that? The right answer is that we have to first focus on getting the economy back on track."

Mr. Obama is scheduled to hold another news conference Tuesday to talk about his spending priorities and streamlining government, and is expected to name Peter Orszag to be budget director. He also said he would announce "meaningful cuts and sacrifices," though it was not clear whether that would include specific line items or broad principles.

But with the deficit possibly reaching $1 trillion, or about 7 percent of gross domestic product, for fiscal 2009, budget analysts said cuts would be next to irrelevant.

"What we're going to be doing is what I call a budget two-step. The first step is stimulus - don't worry about the deficit. The second, whenever we recover, will be don't worry about the economy, worry about the deficit," said Stan Collender, a former congressional budget staffer who founded the Federal Budget Report.

Mr. Collender said the playing field for budget cuts is so small - possibly as little as $20 billion in a federal budget that should well exceed last year's $3 trillion - that it doesn't make sense in the short term for Mr. Obama to get into a fight with his former congressional colleagues over small-ticket items they want to protect.

"Why bother?" he said.

In his news conference, Mr. Obama laid out a hefty agenda for his first Cabinet appointment, tasking Treasury Secretary-designate Timothy F. Geithner and the rest of his new economic team with crafting a spending package to "jolt" the economy.

In addition to Mr. Geithner, president of the New York Federal Reserve Bank, the new team includes Lawrence H. Summers, a former Treasury secretary, as head of the National Economic Council; Christina D. Romer as director of the Council of Economic Advisers; and Melody C. Barnes, who will run the Domestic Policy Council.

During the third presidential debate, Mr. Obama said he was proposing "a net spending cut" and, when asked what specific programs would be chopped, listed one specific cut - $15 billion for the Medicare Advantage program, which offers extra benefits, but at a higher cost.

On Monday, though, he and his advisers said that with the economy in such poor shape, there's little choice but to spend.

"Most economists, whether you're a liberal or conservative, all agree that if you're going to do a stimulus, or an economic-recovery package next year, you can't pay for it at the same time. That just is not then a stimulus," Obama transition adviser Bill Daley told CNN's "The Situation Room," adding that the long-term deficit was an issue to be addressed "over a very long term."

Mr. Obama on Monday would not put a price tag on his preferred stimulus package, though some of his Democratic colleagues have said it should be at least $700 billion, but said he viewed it as a way to create the 2.5 million jobs he has promised to deliver and to make a long-term investment in the nation's infrastructure.

Some critics have said Mr. Obama's economic team is relying heavily on players who helped create the Wall Street atmosphere that contributed to the current financial woes, but lawmakers of both parties were comforted by Mr. Obama's decision to use proteges of President Clinton's centrist Treasury Secretary Robert E. Rubin.

Sen. Charles E. Grassley of Iowa, top Republican on the Senate Finance Committee, said he's now "less concerned" than before because of the names Mr. Obama has announced.

Mr. Obama also scolded automakers, telling them they should not expect a "blank check" from the government.

"Taxpayers don't want to see more money wasted, so we need to see a plan," he said.

Paul R. Cullinan, a former Congressional Budget Office official who is now at the Brookings Institution, said that with 62 percent of the budget going to entitlement spending and much of the rest to defense and other nearly untouchable programs, there's actually little room in the $3 trillion budget for cuts.

Still, he said, Mr. Obama should try to offer some cuts, if only for symbolic value.

"It might be a wise thing for a president to come in and take on some programs in the areas where his supporters expect they'll only get increases - come in and say, nope, we're going to scrub everywhere," Mr. Cullinan said.

If Mr. Obama does want to make specific cuts, J.D. Foster, senior fellow at the Heritage Foundation, said there is a road map. The Bush administration every year evaluates programs for effectiveness and even proposes about 150 it says should be eliminated or drastically reduced. Most of the list continues to be funded by Congress anyway.

"His problem's going to be the same one the Bush administration had: These programs exist because there are people in Congress who like them," Mr. Foster said.

He also predicted that Mr. Obama will forgo massive spending cuts for now.

"They're going to disregard the deficit as an issue for the first two or even three years, because it's going to be so large," he said.

On tax cuts, Mr. Obama had talked during the campaign about raising taxes on those making $250,000 or more and providing a tax cut for those making $200,000 or less. On Monday, he said he will follow through on the tax cuts, but said he's not sure whether to immediately repeal the Bush tax cuts on high earners or to instead just wait for the tax cuts to expire on their own.

"Whether that's done through repeal or whether that's done because the Bush tax cuts are not renewed is something that my economic team will be providing me a recommendation on," he said.

• John Ward contributed to this article.

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