Economists prescribe deeper deficit

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By David R. Sands

The financial crisis has rocked the economy's foundations, but it also has opened a window of opportunity for the next president.

It's an opportunity neither Republican Sen. John McCain nor Democratic Sen. Barack Obama seems ready to seize.

With the U.S. economy apparently heading into a deep recession, many economists and budget analysts argue that the next administration should — initially, at least — open its wallet, not tighten its belt. Running up the deficit, through new spending, tax cuts or both, is exactly what a declining economy needs, at least in the short term, the analysts said.

"Definitely in the short term, the policy should be to spend and not worry about the impact on the deficit," said Rob Shapiro, who was a top economic adviser to President Clinton and a specialist in globalization at the center-left NDN think tank.

"Certainly that's the policy you should be following in the face of a deep recession, when there's not a lot of downside risk from inflation."

Conservative Financial Times columnist Samuel Brittan said the fears that short-term stimulus spending by governments will raise deficits miss the point. Even the $700 billion Wall Street rescue plan approved by the U.S. government — part of a more than $2 trillion international bailout of banks by governments around the world — does not change the equation.

"Maxims about debt that might be prudent for families can be the height of folly for government," he wrote.

British economist John Maynard Keynes is credited with the basic insight, arguing that the Great Depression was prolonged because Western governments insisted on balancing budgets, raising taxes and cutting spending at a time when private economic activity had ground to a halt.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan research group, said both candidates must put together a credible long-term plan to deal with the exploding deficit, but that the government should be priming the pump in the short term.

"These economic times are so foreign to what we're used to that nobody really knows whether we need a stimulus plan or not," she said. "But we should probably err on the side of caution and have one, with the very clear understanding that in the longer term, we have to get the budget under control.

"And the big risk is always that the transition from one approach to the other is extremely difficult."

David Rothkopf, president of Garten Rothkopf, a Washington economic consulting firm, added, "I do think over the next two years we have to be focused in fiscal policy much more on stimulating the economy than on balancing the budget."

But he and Mr. Shapiro cautioned that bigger short-term U.S. deficits — which the Treasury Department reported this week tripled in the 2007-08 fiscal year to $455 billion — had to be matched by a commitment over the longer run to repair the U.S. balance sheet once the economy revives.

The Democrat-led Congress is already considering a lame-duck session to pass a $300 billion stimulus package, the second this year.

But the idea that the next administration should focus first on spurring the economy appears to have gotten lost in the three presidential debates, with Mr. McCain and Mr. Obama both on the defensive when asked what specific programs and promises they would cut in the wake of the economic implosion.

Mr. Obama said he would take a "scalpel" to the federal budget and focus on his spending priorities such as energy and health care, while Mr. McCain promised to use a "scalpel and a hatchet," including a one-year freeze on spending for programs outside of defense, support for veterans and a few other priorities.

Neither has tried to make the case that the next administration may be taking office amid a deep economic downturn and that fiscal policies may have to be adjusted.

Miss MacGuineas said she sympathized with the candidates, who are being forced to adjust their tax and spending programs on the fly in a rapidly deteriorating economic climate.

"It's tough for them because talking straight about some of these choices three weeks before an election is beyond suicidal," she said. "But it's a loss for the American people, because they won't be as prepared as they should have been when the choices really have to be made."