Wednesday, January 7, 2009

Obama Warns of Trillion-Dollar Deficit Potential





By JEFF ZELENY and EDMUND L. ANDREWS

WASHINGTON — President-elect Barack Obama on Tuesday braced Americans for the unparalleled prospect of “trillion-dollar deficits for years to come,” a stark assessment of the budgetary outlook that he said would force his administration to impose tighter fiscal discipline on the government.

Mr. Obama sought to distinguish between the need to run what is likely to be record-setting deficits for several years and the necessity to begin bringing them down markedly in subsequent years. Even as he prepares a stimulus plan that is expected to total nearly $800 billion in new spending and tax cuts over the next two years, he said he would make sure the money was wisely spent, and he pledged to work with Congress to enact spending controls and efficiency measures throughout the federal budget.

“We’re not going to be able to expect the American people to support this critical effort unless we take extraordinary steps to ensure that the investments are made wisely and managed well,” Mr. Obama said, speaking about the dire fiscal outlook after meeting with his economic team for a second straight day.

In his most explicit language on the subject since winning the election, Mr. Obama sought to reassure lawmakers and the financial markets that he was aware of the long-term dangers of running huge deficits and would take steps to limit and eventually reduce them.

Big deficits force the government to borrow more money, saddling future generations with large financial burdens and leaving the nation reliant on foreign governments and other big investors to lend cash. The problem is even more acute now because credit markets, which in recent months have made it much harder and more expensive for businesses and individuals to borrow, could be further strained by financing a huge government deficit.

On Wednesday, Mr. Obama plans to name a chief performance officer with the task of finding government efficiencies. He has chosen Nancy Killefer, who is director of McKinsey & Company, a management consulting firm, and was an assistant secretary of the Treasury in the Clinton administration. The Congressional Budget Office will also release its latest budget estimates, providing the first official predictions of the shortfalls tied to the economic slowdown and the fallen financial markets.

Mr. Obama has made the economy virtually the sole public focus of his first full week in Washington since winning the election. He called on Tuesday for the creation of an economic recovery oversight board that would include outside advisers to monitor spending — and find abuses — of the economic stimulus plan. He also said earmarks for lawmakers’ special projects would be banned from the bill.

“When the American people spoke last November, they were demanding change — change in policies that helped deliver the worst economic crisis that we’ve see since the Great Depression,” Mr. Obama told reporters at his transition offices. He added, “They were demanding that we restore a sense of responsibility and prudence to how we run our government.”

But Republicans and some fiscally conservative Democrats have expressed concern that the need for a substantial economic stimulus plan could sweep away for years any serious effort to bring government spending into line with its revenues.

While economists almost universally support running large deficits to combat the kind of steep recession the country is grappling with now, they are increasingly expressing alarm at the prospect of sustained fiscal imbalances heading into a period in which the aging of the population will create huge budgetary strains because of the growing costs of the Medicare and Social Security programs.

Still, the deficit now seems likely to be so large that it will inevitably constrain Mr. Obama’s administration to some degree. At a minimum, it seems sure to force him to walk a line between maintaining the confidence of the financial markets, which could drive interest rates up sharply if they doubt his will or ability to improve the government’s financial condition in the long run, and various constituencies that will be pressing him to make good on his campaign promises.

Mr. Obama has so far not backed away from any of the big initiatives he ran on, including his plan to expand health insurance. On that issue, as on others, he has begun making a case that the economically prudent course is to invest now in addressing the nation’s big challenges rather than avoiding them in the name of saving money in the short run.

Mr. Obama was not specific about the size of the deficit he expects, beyond his reference to “a trillion-dollar deficit or close to a trillion-dollar deficit” for the fiscal year that ends Sept. 30. Aides said later that the estimate — in line with what economists have been anticipating given the economy’s rapid deterioration — did not include the costs of the proposed stimulus package, which could add hundreds of billions of dollars more to the red ink.

At $1 trillion, the deficit would not only shatter the largest previous shortfall in dollar terms — $455 billion last year — but it could also exceed the post-World War II-era record by the measure more meaningful in economic terms, the deficit as a percentage of total economic activity.

Diane Rogers, chief economist at the Concord Coalition, a nonpartisan organization that supports fiscal discipline, estimated that the deficit this year would hit 7 percent of the gross domestic product. The largest previous record in those terms was in 1983, when it hit 6 percent.

Mr. Obama declined to say on Tuesday whether the budget that his administration submits to Congress in February would be larger than the $3.1 trillion budget that President Bush submitted for the current fiscal year. He also did not offer any specific examples of how spending could be controlled, saying only that his advisers had been scouring the budget looking for programs that could be eliminated.

“I’m going to be willing to make some very difficult choices in how we get a handle on his deficit,” Mr. Obama said. “That’s what the American people are looking for and, you know, what we intended to do this year.”

But the short-term budget shortfalls are big enough to pose serious headaches in themselves, especially if bond investors start demanding higher interest rates.

In just the first three months of the 2009 fiscal year, which began on Oct. 1, the government spent $408 billion more than it took in. About one-third of that shortfall stemmed from the Treasury Department’s rescue program of injecting capital into banks, which the government will book as an “investment” rather than “spending.”

The recession itself will add hundreds of billions of dollars to the deficit. Even before Congress adds any new stimulus measures, higher outlays will climb for existing unemployment benefits, food stamps and other social programs. Tax revenues will fall because of rising unemployment, falling corporate profits and huge investment losses in the stock and bond markets. Mr. Obama’s stimulus program could add another $400 billion in each of the next two years.

“One thing investors have to be thinking is, what’s the exit strategy? How do we unwind this stuff?” said Robert Bixby, director of the Concord Coalition. “I would analogize it to what the government is doing with the auto companies. Congress said, we’ll give you the money but you have to show us a plan for sustainability.”

Mr. Bixby added, “Now the government is in the same position of the auto companies, but they haven’t come up with any plan for sustainability.”

As the latest budget estimates are released on Wednesday, the good news, at least for the moment, is that the Treasury’s borrowing costs are as almost as low as they have ever been. Short-term Treasury rates are hovering just above zero, but the rates on 10-year Treasury bonds are about 2.5 percent.

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