The COVID-19 inflation episode: Lessons from emerging markets


The COVID-19 inflation episode: Lessons from emerging markets


Mapping the Obama Administration’s Priorities

No one seriously believes that the President’s budget will be enacted during 2012. Not only is 2012 a campaign year but our polarized politics makes taking even modest steps virtually impossible. Instead the budget is primarily a concrete way of signaling the administration’s priorities and what they would work on if reelected.

With this reality in mind, here’s my take on the overall themes in this year’s budget and what they signal about the administration’s priorities.

First, the administration cares about jobs. It proposes, as it did last September, a number of job-creating measures, including tax cuts and assistance to states. How much these will still be needed by 2013 is an open question and will depend on the strength of the economic recovery over the coming year. Sadly, in my view, political gridlock will prevent these measures from going into effect any time soon when they could do the most to bolster that recovery.

Second, the administration wants to tackle deficits and debt. It is proposing spending cuts and revenue increases totaling around $4 trillion (including interest) over the next decade with a ratio of about 70 percent spending cuts to 30 percent revenue increases. Again, Republican opposition to almost any tax increase means these proposals will be dead on arrival when they reach Congress, but the total amount of deficit reduction is enough to stabilize debt to GDP and the balance between spending and taxes is similar to that endorsed by some bipartisan groups, including Simpson-Bowles.

Third, the revenue increases are targeted on the wealthy. They include limiting tax deductions taken by the affluent and ending the Bush tax cuts for this group along with closing some corporate tax loopholes.

Fourth, the administration has shied away from proposing fundamental tax and entitlement reform, both of which are badly needed for the longer term. The administration can be criticized for a failure to lead on these big items but without some bipartisan support, neither is going to happen. Last summer’s negotiations between the President and Speaker Boehner showed some willingness on the part of both sides to craft a solution. But in the end these negotiations fell apart, apparently as the result of internal disagreements within each caucus.

Fifth, the administration’s spending proposals are not as large as they seem at first blush. First, they take credit for the savings already enacted as part of the Budget Control Act and for the drop in military spending associated with ending the wars in Iraq and Afghanistan. I have some sympathy for this position since it recognizes that fiscal austerity has so far been entirely focused on spending rather than revenues. But it will raise eyebrows about how many “new” cuts the budget actually contains. There is no question that Republican insistence on spending cuts has forced the President’s hand and given us a smaller government than we might otherwise have.

Finally, the administration maintains that if their proposals were enacted, there would be no need for the sequester that is supposed to go into effect in early 2013 as a result of the Super Committee’s failure. One interesting result is that discretionary spending takes less of a hit that it might have if the administration had felt obliged to include the effects of the sequester in their budget. This preserves the President’s ability, if reelected, to invest more in infrastructure, research, education, and other measures designed to spur long-term productivity and growth. It also means fewer cuts to a variety of social programs that help low- and moderate-income families.

A budget is a detailed blueprint with more numbers than any ordinary citizen can possibly absorb. At the same time, it forces an incumbent President to be quite specific about his agenda. Too bad that during this election year, Republican candidates aren’t required to be just as specific about what they would do to create jobs and put us on a more sustainable fiscal course. Governor Romney’s fiscal plan, for example, promises expensive new tax cuts with the bulk of the benefits going to the top 1 percent. The lost revenue adds almost $2 trillion to existing deficits over the next decade. To help pay for this and reduce the deficit, he promises to cut spending immediately to 20 percent of GDP and to 17 percent eventually. But with spending currently at about 23 percent of GDP, there is no way to get from here to there without making deep cuts in all parts of the budget-including Social Security, Medicare, and defense. The President’s proposals will not please everyone, but at least they are specific and call for broadly shared sacrifice.