PARASILITI: Dealing with a deficit during recession

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By Andrew Parasiliti

OP-ED:

President-elect Barack Obama is urging quick congressional action on what is now being called "the American Recovery and Reinvestment Plan." Acknowledging that the economy will get worse before it gets better, including an unemployment rate that could rise to perhaps 10 percent, Mr. Obama and his team are working with Democratic congressional leaders on a stimulus package that is said to include middle-class tax cuts, aid to state and local governments, public-works projects and "investments" in energy, infrastructure, health care, and education.

We know that the cost will be high - reportedly between $675 and $775 billion - and that it will be off-budget. It will add to a federal budget deficit that already stands at approximately $450 billion, not including the $700 billion appropriated for the Troubled Assets Relief Program (TARP), which is also off-budget. And then there are the runaway costs and looming shortfalls in Social Security, Medicare and Medicaid, which will require either substantial tax increases or reductions in benefits (or a combination of both) to keep them solvent.

Left out and even dismissed in deliberations over the stimulus plan are its implications for the federal budget deficit.

Mr. Obama said on "Meet the Press" Dec. 7: "We can't worry short term about the deficit … We've got to make sure that the economic stimulus plan is large enough to get the economy moving." But can the United States "recover" while carrying what may eventually be a budget deficit exceeding $1.5 trillion?

It was not so long ago that we were rightly concerned about a deficit less than one-third of this projection. Of course, we are now supposedly all Keynesians, and these times do require a stimulus and some deficit spending. But while the proposed investments in energy, infrastructure, heath care and education may be worthwhile, should they be included in a short-term, off-budget stimulus package? For example, some proposed stimulus investments or subsidies in "green" energy may be redundant because of state mandates for renewable energy that are already in the pipeline.

And in thinking prescriptively about the economy, is there not also a lesson from the current crisis that bills eventually come due, and that when you spend more than you take in, there is a day of reckoning?

That was the experience of those Americans who bought houses they could not afford, and who are now facing foreclosure or painful economic decisions. Shouldn't it also be the lesson of the U.S. government that we need to stop living beyond our means? It is unrealistic either to imagine "growing" out of a deficit of this projected magnitude or that there will be a return on the TARP expenditures anytime soon. The day of reckoning for these massive deficits will eventually come in the form of tax increases or printing more money, and the resulting weakened dollar and inflation that goes along with the latter option. In sum, the recovery will be running on even more borrowed money from foreign creditors and on borrowed time. Our savings and retirement accounts will know no long-term security as long as we carry such massive deficits and we are taking no steps to address them.

The stimulus package should therefore be limited in scope and focus on tax cuts and those projects that are directly linked to job creation. The longer-term "investments," however worthy, should be phased in as part of the normal budgetary process and paid for by reductions in other government spending. Disbursement of the second tranche of the $350 billion of TARP funding should also be postponed until after the Obama administration takes office and lays out specific plans for a financial strategy, as is required by law. At the core of the current crisis remains the stability of our banking and financial institutions. The TARP program demands greater accountability and oversight, and should be an integral part of the incoming administration's recovery plan. TARP's focus should be narrow and strategic, and it should avoid becoming an omnibus bailout fund for many of the troubled industries facing dire straits in the coming year.

The economic crisis should not give license to continue the breakdown of the budget process and unrestrained deficit spending that is in good part a cause of our current troubles. Our elected leaders must be held accountable for an economic recovery that does not trade rhetorically on a strained but now well-worn comparison with the "New Deal" policies of Franklin Roosevelt. Instead, it should offer a disciplined and realistic path to sustained economic growth. Tossing out the budget process and increasing deficits do not make sound economic policy - either in the best or worst of times.

Andrew Parasiliti is an executive director of BGR Capital & Trade and vice president of BGR International in Washington.