Budget Concerns Take Back Seat To Bailouts

Budget hawks were aghast when the federal deficit hit a record $455 billion in fiscal 2008, more than double the previous year.

That figure could double again in 2009, to $1 trillion, but even balanced budget advocates are saying that may be the price we have to pay to revive the failing economy.

President-elect Barack Obama, at a news conference Monday, served notice that "we're going to see a substantial deficit next year, bigger than we've seen in a very long time."

But he stressed that, before putting Washington's financial house in order, "we've got to first focus on getting the economy back on track. We've got to first focus on making sure that we're creating those 2.5 million jobs."

While nobody likes a deficit, many economists agree that heavy spending by the federal government - on food stamps or unemployment benefits or public works projects - may be necessary to keep economies moving in times of recession or war.

The problem is that this time Washington was racking up massive deficits even before the current economic downturn.

The government recorded surpluses in the fiscal years 1998 through 2001, ending Sept. 30 each of those calendar years.

But that all changed once President George W. Bush was in office a year. Saddled with costs from the Sept. 11 attacks plus the tax cuts he pushed through Congress, Mr. Bush took the $127 billion surplus he inherited from former President Bill Clinton and turned it into a $159 billion deficit the following year. Then wars in Iraq and Afghanistan and more tax cuts swelled it to $413 billion in 2004, a record until $454.8 billion for the fiscal 2008 year that ended Sept. 30.

The White House Office of Management and Budget in July estimated the 2009 deficit at $482 billion, but that doesn't take into account possible losses down the road from loans and investments made under the $700 billion financial rescue plan enacted in October or other efforts to bail out stricken financial institutions.

The Congressional Budget Office put the deficit in October, the first month of fiscal 2009, at a staggering $232 billion. Its figure included $115 billion in bank stock purchases the Treasury Department made as part of the financial bailout.

Also not part of estimates are Mr. Obama's plans to push through in the first days of his administration a massive stimulus package, which could cost $500 billion or more.

The deficit, Mark Zandi, chief economist and co-founder of Moody's Economy.com, said at Senate Budget Committee hearings last week, "could easily exceed $1 trillion in fiscal 2009 and go even higher in 2010." He said borrowing by the Treasury could top $2 trillion this year.

Borrowing adds to the national debt, the money the federal government owes to states, corporations, individuals and foreign countries such as China and Japan who buy U.S. Treasury notes, bonds and other debt instruments. The debt, which stood at about $5.7 trillion in 2007, topped the $10 trillion mark in October and now stands at about $10.6 trillion.

Zandi said Obama's stimulus package should be at least $400 billion, equal to more than 2.5 percent of the nation's gross domestic product. That sum would be about equal to the direct economic costs of the financial panic, he said.

James Horney, director for federal fiscal policy at the Center on Budget and Policy Priorities, also said it was "pretty likely" that the deficit this year will approach $1 trillion. Big deficits can't be helped in bad times, he said, as the government is required to spend more to help the needy and stimulate the economy at the same time it is seeing a decline in tax revenues.

The national debt could rise even more than the deficit in the short term, he said, although the debt situation will improve as the government begins selling the assets it is now purchasing to help troubled banks and financial institutes.

"The question, of course, is what's the alternative?" Horney said. If the government doesn't move to stimulate the economy, "the outcome could be much worse."

Senate Budget Committee Chairman Kent Conrad, a Democrat and a leading advocate for fiscal discipline, acknowledged at the hearing last week that "you have to have lift this economy. Only the federal government can do it because credit markets are still debilitated."

But he added that unless the government enters a process "to get us back to fiscal responsibility, we will lose credibility and we will have the danger of even greater long-term damage."

Mr. Obama, at his new conference Monday, appeared to hear that message. "Part and parcel" of his efforts to boost the economy, he said "is a plan for a sustainable fiscal situation long-term, and that's going to require some reforms in Washington."