Friday, September 25, 2009

Obama's greatest challenge

It's not now. Getting us out of recession is the easy part. Voters blame the recession on Bush, so Obama either gets credit for getting us out, or he ends up not getting blamed for failing to get us out. Not much downside for the President.

No, the real challenge for Obama is going to be the next wave of prosperity. How could that be a challenge, you ask? Because of our huge debt. During good times, it must come down to sustainable levels, or better yet, we should be running surpluses. But Obama's own forecasts call for the deficit to still be in the $600 billion range, or 4% of GDP, by 2019.

The upshot of that is that when we next go into recession, the government will crash. There will be no room for fiscal stimulus. There won't even be a way for the government to meet its current obligations. Let's do the math:

Obama's budget outlook assumes 8 good years between 2011 and 2019. That's some serious optimism, but let's go with it. Eight solid years of prosperity, and the best we can do is get the deficit down to 4% of GDP? According to his plans, the national debt would be somewhere between 85-95% of GDP. Pretty dangerous territory.

So what happens if we go into 2020 with that $600 billion deficit and a recession hits? Armageddon, basically. Normal recessions typically double budget deficits, so let's conservatively assume a $1.2 trillion deficit for 2020. But that's probably way too conservative. The President's tax plans rely excessively on the top 1%, whose income is more volatile and drops precipitously during recessions. So the deficit could easily reach $1.5 trillion. But wait! Medicare's out of money! Gotta shore that up. Call it $1.7 trillion. That's before stimulus and that one year tips us over 100% Debt-to-GDP.

So what's Obama's challenge? It's not good enough to slowly lower the deficit over the next few years. Once the recovery sticks and we are in boom times, Obama must aggressively cut spending. We must get to surplus by 2015, preferably sooner, or the next recession will be budgetary armegeddon.

As with global warming, the longer he waits to make the tough decisions, the more expensive those tough decisions will be. In 2012, he can make minor cuts to social programs and defense and reform entitlements. If he doesn't, then in 2020, his successor will have to basically end most of those entitlements and slash social spending to nothing. We'll be back in the 19th century as far as the role of the federal government is concerned. The progressive project will have failed spectacularly.

In 1933, Franklin Roosevelt saved capitalism from itself. In 2012, Barack Obama must save liberalism from itself