The Daily Strike-8/25/09-The Economy and the Economist

Good evening and welcome to the Daily Strike. It's too depressing to discuss health reform today, so we're taking the day off. All I will say is that Senator Russ Feingold (D-WI) doubts a bill can be done by Christmas, and Senator Arlen Specter (D-PA) says his views on reform have changed because of the town hall meetings. Ugh.

THE ECONOMY: The White House released its revised budget estimates today, conveniently saving the announcement until Congress and the President had both skipped town. The number are not good. The 10-year deficit projection rose from $ 7 trillion to $9 trillion, and our national debt will make up 76% of GDP by 2019, the highest since World War II. Republicans, of course, used this opportunity to say that health care reform is even less doable, with such a high deficit. The ranking member of the House Ways and Means Committee, Dave Camp (MI) declared that if the health care bill wasn't already dead, "it is now." Our friend Ezra Klein reminds us why that kind of talk is misleading at best, and nihilistic at worst. President Obama says he won't sign a bill that increases the deficit. The worst deficit projection we've seen from any health bill was a ten year $200 billion tag on the House measure. That's a drip in the bucket compared to the Bush tax cuts (not paid for), Medicare Part D (not paid for), the War in Iraq (not paid for) and even the FY 2010 Defense budget, which is over $500 billion. I don't see Camp saying that those proposals should be "dead." Ezra wisely points out that when Republicans controlled the government, they never paid for anything. Because of this, they were able to build an association with the public between spending and deficit spending.

Certainly, there are areas in the federal budget that need to be cut to help bring down the deficit. Defense and agriculture subsidies come to mind immediately. But the point that is NEVER emphasized in the media, is the deficit skyrockets when the economy is in deep recession. During a downturn, when unemployment is high and GDP decreases or remains stagnant, tax revenues decrease. That's why, despite what Republicans might say, the government must continue to spend money to stimulate the economy and get us out of recession.

THE ECONOMIST: The President today renominated Ben Bernanke to be chairman of the Federal Reserve for the 4 year term beginning in January of 2010. I have mixed feelings on this announcement. On the one hand, Bernanke was asleep at the switch and was blindsided by the housing and credit busts. On the other hands, his unprecedented, bold action over the last year has helped bring the economy back from the brink. Even Paul Krugman thinks so. Plus, the alternative almost certainly was Larry Summers, chair of the Economic Council, who probably would be much worse than Bernanke. Bernanke's job will not be easy. At some point, the Fed is going to have to scale back some of the measures it has taken to increase liquidity in the system. Right now, short-term interest rates are basically at zero. As the economy starts to recover, that rate will have to increase lest we get stuck with double digit inflation. It won't be fun to have to take money out of the system when we will still likely have high unemployment and slow growth.