As he awaits his Jan. 20 inauguration, President-elect Barack Obama faces a crushing economic squeeze of historic proportions.
On the one hand, many economists and business groups say that the federal government must implement a huge economic stimulus plan in the range of $500 billion to $1 trillion to help put the skids on a severe recession that is expected to worsen this year.
Without a stimulus plan, the recession could "linger for years," Obama warned in a speech last Thursday. He is expected to propose a stimulus package of up to $800 billion that would include a mix of temporary tax cuts and spending measures focused on job creation and infrastructure improvements.
But Obama and Congress face a dilemma in enacting a stimulus plan. The Congressional Budget Office projects that the federal budget deficit for the current 2009 fiscal year will be a colossal $1.2 trillion. That would be the mother of all deficits — more than 2 1/2 times the record-high budget shortfall of $455 billion recorded in fiscal 2008.
The CBO's gloomy forecast follows record red-ink spending during the eight-year Bush administration, in which both President George W. Bush and Congress (whether under Republican or Democratic leadership) have been consistently irresponsible in permitting a fiscally deadly combination of excessively large tax cuts (especially for wealthy people) and excessively high, out-of-control federal spending.
Irresponsible lending practices, lax government regulation of financial institutions, Wall Street greed and corruption, and a weak energy policy contributed mightily to the housing collapse, credit crunch, stock market meltdown and record-high energy prices of 2008. Those things, coupled with Washington’s haplessness, created the perfect storm that is buffeting Obama as he prepares to lead the nation.
I have mixed emotions about an economic stimulus plan but generally side with everyone from Nobel Prize-winning economists to the U.S. Chamber of Commerce in reluctantly agreeing that one is probably needed.
But I am dead-certain about one thing: There must be a return to fiscal sobriety once the stimulus plan kicks in and the economy begins reviving, which likely won't be until 2010.
The necessary post-stimulus remedies should include:
Rescinding a substantial portion of the Bush tax cuts enacted in his first term.
Curtailing excessive federal spending (in part by embracing a pay-as-you-go policy whereby spending increases must be offset by spending reductions elsewhere or by new revenues).
Adopting a simplified federal tax code that reduces the excess number of tax deductions, credits, exemptions and loopholes.
Cracking down on tax cheats.
Raising federal fuel taxes to generate more money for transportation improvements and encourage more fuel-efficient vehicles.
Enact Social Security and Medicare reforms that address the enormous long-term funding shortfalls facing those two ever-growing entitlement programs (and curtail the practice of spending excess Social Security payroll tax revenues for other federal expenditures).
Gradually extricate ourselves from the unnecessary and very costly war in Iraq.
In the waning years of the Clinton administration, the government ran up budget surpluses, the first since 1969. But the national debt has ballooned to more than $10.6 trillion in the Bush years, and a $1.2 trillion deficit for fiscal 2009 would push it to nearly $12 trillion.
The stimulus plan, would, in the short term, further expand the deficit. But it will likely be worth it if it helps jump-start the stalled economy and steer it back in the right direction.
But, post-stimulus, Washington must stop guzzling the tempting cocktail of excessive federal spending, unaffordable large tax cuts and unreformed entitlement programs, a deficit-inducing concoction that has contributed greatly to the financial hangover that Obama will inherit.
Fiscal sobriety, boring and unpleasant as it is, must return to the White House and Capitol.