Obama: Fiscal Situation "Untenable"

You don't say, Mr. President.

I realize that we're facing an untenable fiscal situation. There was a $1.3 trillion deficit staring at me when I took office, and although the economic crisis and the steps we took to stop the freefall temporarily added to our fiscal challenges, it's clear that we're going to have to get serious about the deficit.

And that's why I've proposed a three-year freeze on non-security discretionary spending. That's why I've launched a bipartisan deficit reduction commission, which will be reporting in a few months.

Keen government observers and other Jane's Addiction fans know what's coming next: The big "but":

What I won't do is cut back on investments like education that are directly related to our long-term economic performance. Now is not the time to sacrifice our competitive edge in the global economy.

A-ha. Because nothing says "competitive edge" like "doubling spending while failing to improve results."

Note what the news reports probaly won't, that A) this was a meeting of the President's Economic Recovery Advisory Board, B) the first 10 paragraphs of his remarks were about "maintain[ing] our commitment to education," particularly strengthening community colleges, and C) there was zero discussion, in the long ensuing Q&A with the Economic Recovery Advisory Board, about concretely addressing this "untenable fiscal situation." There was tons of talk about home weatherization, though.

The closest the discussion came was when Obama asked Martin Feldstein, who the president described as being "obviously concerned about our long-term fiscal outlook," to comment on "cost-effective" ways "we can boost aggregate demand" while also reducing "uncertainty, whether it's legislative, health care, financial regulatory reform, or taxes." Here's Feldstein's answer:

MR. FELDSTEIN: […] Yes, you're right, I am very concerned about the size of the out-year fiscal deficits. And I would emphasize that the size of the aggregate demand problem is massive. We're talking about a GDP shortfall of about a trillion dollars, annual rate of a trillion dollars. That's the size of the gap between the GDP today and what it would be if we were operating at full employment. And that's why we have about a 10 percent unemployment rate.

So what can be done? Well, I think one thing—I have thoughts about three things. First, fixing the housing markets, the residential housing markets.  With the end of the first-time homebuyer credit, I think we're beginning to see house prices coming down again. I think that's likely to accumulate more falls in house prices. That will cut consumer spending. And it makes it harder for people to move from where they are to where the jobs are.

The administration's policies, as you know, have focused on helping people who are having a hard time meeting their monthly payments, on mortgage modifications that cut the monthly payments, but they don't deal with the major problem of individuals who are underwater in their mortgages, who owe more on their mortgages than the house is worth, and that's about 30 percent of all of the people who have mortgages. They owe more and the average ratio of their debt to the value of their home is about 130 percent. So it's not surprising that we're seeing increasing volumes of foreclosures and defaults, and that can only get worse if house prices fall. So I think an expanded, aggressive strategy to deal with principal modification is really necessary.

The second thing is helping businesses get loans so they can expand their hiring and expand their business, helping small businesses in particular. And the key there as I see it is that local banks are cutting back on their willingness to lend because of their expected losses on commercial real estate. Congress recently passed your plan to use $30 billion of TARP money to inject capital. It remains to be seen how much the small banks are going to be willing to take up some of those funds, but I think more can be done.

In particular, what I think could be done is to allow the small banks that sell impaired loans to the public-private investment partnership or to others, to amortize the resulting losses of capital over several years—say, five years—so that if they sell off an impaired loan that cuts their capital, instead of being forced to cut back on their lending, they would have a period of time over which to do it.

And the third thing deals with the tax rates. As you know, I think that the current tax rates should be continued for two years for everybody, but with no legislative commitment after that. I think the two-year extension would help to keep demand alive at a time when the economy is weak, and the notion that it would not continue after that would take some $2 trillion off the size of the national debt at the end of the decade.  And that would give a boost to confidence that the administration is really focusing on bringing down the out-year fiscal deficit.

So I think all three of those can help to move in the right direction and they do so without increasing the fiscal deficit.

There you have it. The 47 smartest economists around the president of the United States agree that the best way to solve the "untenable fiscal situation" is to boost education spending, weatherize homes, throw more bad money after bad in the housing market, more bad money after bad in the Small Business Administration, and maybe (though only over the president's dead body) freeze all taxes for two years. That oughtta tenabilize it.