While President Barack Obama was delivering a highly effective speech in Cairo, attempting to reposition the United States in the Muslim world, back on the home front economic issues were coming home to roost far more quickly than anticipated (at least by me).
When Obama returns, he will face a long-term challenge not unlike that which President George H.W. Bush faced in dealing with the mountains of federal debt left behind by the borrow-and-spend Reagan years. It was nearly 15 years later, during the Clinton Presidency, before a federal budget got into the black. Let me illustrate by a collection of indications from this past week alone.
1. Treasury Secretary Tim Geithner, speaking in China, drew laughter from the audience when he declared that the U.S. Government was taking strong steps toward reducing its budget deficits. The Chinese are financing a large share of U.S. public debt.
2. German Chancellor Angela Merkel attacked the Federal Reserve, European Central Bank, and Bank of England for facilitating policies which could lead to explosive inflation down the road. She particularly singled out the ECB for bowing to international pressure in buying $85 billion in corporate bonds — which, she noted, was a relatively modest action in comparison to those taken by the U.S. Fed and Bank of England. (Germany, of course, has been spooked about inflation since that which destroyed the mark and helped lead to the ascension of Adolf Hitler to power).
3. Fed Chair Ben Bernanke at about the same time was warning the U.S. House Budget Committee that rising federal budget deficits were a threat to long-term stability.
4. Olivier Blanchard, chief economist of the International Monetary Fund, pointed out that current anti-recession spending would lead to rising interest rates costing the United States and other industrialized countries billions more than foreseen over the next several years. (Even a percentage point increase would cost the U.S. Treasury an additional $50 billion annually and, eventually, an additional $170 billion annually, given current projections. Since the end of 2008, the yield on benchmark 10-year Treasury notes has increased by 1.5 percentage points).
5. A Citigroup report predicted that the U.S. Government will be forced to sell more than $5 trillion in new debt in 2009 and 2010. A Congressional Budget Office report estimated that in 10 years the government's outstanding debt would amount to 82 percent of Gross Domestic Product (GDP) — about $17 trillion.
6. The independent, bipartisan Committee for a Responsible Federal Budget, led by people such as former Fed Chair Paul Volcker, Council on Foreign Relations Chair Pete Peterson, former Fed Governor Alice Rivlin, and former Johnson White House chief of staff Jim Jones, issued a document regarding upcoming health-care reform legislation. Any such legislation, the group said, must slow health-care costs; be fully offset by federal spending cuts elsewhere; be sustainable in its financing; and be accompanied by other federal budget reforms. It called for "eternal viligance" lest a health plan contribute to "trillion dollar deficits" beyond the next few years. The bipartisan Concord Coalition earlier issued a similar statement relating to overall federal budget policy.
7. Both print and electronic media have stressed in recent days the public costs attached not only to the earlier financial-bailout and economic-stimulus plans but to the General Motors and Chrysler rescues — if, in fact, they turn out to be rescues.
8. Obama health-care and energy legislation has yet to be introduced, although Obama has called for its passage by July 31. The delays have been caused, in part, by concern in the Congress over the huge public costs associated with the prospective plans.
Deficit spending, of course, was not foremost in anyone's mind last fall when we sought to avert financial calamity and an even deeper recession than the one which has developed. The Congress responded immediately, shortly after his inauguration, to Obama's call for passage, almost sight unseen, of an almost $800 billion economic-stimulus package which, it turned out, would not provide much stimulus until mid-2010, when the recession is expected to have ended. (Less than 10 percent of the stimulus money is in the pipeline today). Obama brushed aside his concern over billions in Congressional "earmarks" within it and accepted a federal budget with record red ink.
Obama as President George W. Bush before him, the Congress, the Federal Reserve, and regulators did what they thought they had to do to head off possible recession and deflation. Now, with things stabilizing, the emphasis is shifting back to the longer-term concern over global inflation.
The record deficits of the Reagan years — President Reagan accumulated more debt in his eight years in office than all prior Presidents, combined, in our national history — created a bipartisan consensus that debt had to be contained. The Gramm-Rudman-Hollings Act created discipline in the Congressional budget process. The shift to a budget surplus probably was the signal achievement of the Clinton presidency. Now we are back at the same place we were in 1981, except that the prospective debt is much greater and the political community more sensitized to debt.
Obama's speechmaking and persuasive skills have been outstanding. Now he faces the more difficult tasks of policy management. In the Middle East, his speechmaking and personal diplomacy must now confront historic cynicism and hatred. Domestically, he must find a way to keep the economy growing while, at the same time, not sacrificing his domestic agenda or setting off dangerous inflation.
Welcome home, Mr. President.