Bipartisan Consensus? Taxpayers Beware

This column, Other People's Money, is written by CNET's Declan McCullagh. It will appear each Wednesday on CBSNews.com.

That's what seems to be happening with $300 billion of proposed stimulus spending that congressional Democrats have championed. They got a boost this week when Fed Chairman Ben Bernanke said it was "appropriate" for Congress to consider the plan.

House Speaker Nancy Pelosi invoked that endorsement to pressure the White House. "I call on President Bush and congressional Republicans to once again heed Chairman Bernanke's advice and ... work with Democrats in Congress to enact a targeted, timely, and fiscally responsible economic recovery and job creation package," Pelosi said. (See related video on CBSNews.com.)

President Bush and other Republicans had been skeptical of another round of bailout-related spending. But after Bernanke's remarks, Bush's press secretary told reporters the president might be open to such a proposal.

Details of the plan are still unclear. Some likely components include more public works spending, more unemployment benefits, more Medicare spending, more food stamps, and more "stimulus checks" akin to checks mailed earlier this year to some taxpayers.

It's not clear that another $300 billion of more deficit spending - more than six times the size of the Department of Homeland Security's 2009 budget request - is wise or necessary.

Washington's current bipartisan consensus says that deficits don't matter. The size of the national debt supposedly doesn't matter. Neither does the cost of the Iraq war, which one book puts at $3 trillion. Or the price tag on any bailouts.

In reality, though, U.S. taxpayers will be forced to pick up the tab one way or another, either through taxes to pay for interest on government bonds, or through higher inflation (a regressive tax that harms the poor more than the affluent).

At the dawn of Bill Clinton's presidency, government debt was $4.3 trillion, and increased by only $1.4 trillion in eight years. Now, thanks to the bipartisan enthusiasm for spending in Congress, the debt limit has been lifted to $11.3 trillion -- and the debt itself has ballooned to over$10.3 trillion, not counting future Social Security and Medicare payments.

The price of this whopping government debt is that taxpayers have been paying over $450 billion a year in interest. Soon that will exceed $500 billion.

If politicians had not run up the nation's credit card, income taxes could be almost 40 percent lower. Eliminating congressional pork and other pet spending projects could slice taxes even further. (The IRS collects $1.37 trillion a year in individual income taxes; only $860 billion would be required without interest payments.)

That's approximately as likely as the New York Times endorsing John McCain and Sarah Palin.

Because Democrats hope to enact their $300 billion spending bill soon after the November 4 election, Bush enjoys some temporary leverage. If he and other Republicans can't defeat the bill, they should insist on preventative measures that would reduce the odds of a second financial calamity.

One option is to gradually privatize Fannie Mae and Freddie Mac and eliminate any implicit or explicit taxpayer subsidy. That's been contemplated by the Congressional Budget Office and endorsed by the American Enterprise Institute. A 2006 study published by the Federal Reserve Bank of Boston found "no evidence" that Fannie and Freddie's existence helped low-income and first-time homebuyers.

In the past, opposition from Fannie and Freddie executives and their allies on Capitol Hill would have thwarted privatization. This is the best chance for reform in a generation.

Another option is to fix regulations that encourage banks to divvy up mortgages through a process called "securitization."

Arnold Kling, a Freddie Mac senior economist turned blogger, notes the perverse incentives that created such a securitization frenzy. The FDIC allows a bank to hold less capital against (that is, take more risks with) low-down payment subprime mortgages that it bought from someone else than it can with high-down-payment mortgages that bank employees sold to longtime, trusted customers.

Any post-election bailout or "stimulus" bill should include real reforms. We'll soon see if Washington's bipartisan consensus is up to the task.