Nouriel Roubini: A presidency heading for a fiscal train wreck

[The Northerner]

What has been the fiscal performance of President Barack Obama? He inherited the worst economic crisis since the Great Depression, as well as a budget deficit that – after much needed bail-outs and a series of reckless tax cuts – was already close to $1,000bn. His stimulus package, together with a backstop of the financial system, low rates and quantitative easing from the Federal Reserve, prevented another depression. Mr Obama also deserves credit that the US, alone among advanced economies, currently supports a “growth now”, rather than an “austerity now” path.

But this is but one half of the picture; we must also judge his first two years on his ability to anticipate what the economy will need tomorrow. Here the picture is much less positive. Given the likely path of fiscal policy after next Tuesday’s election – with the expiration of existing stimulus and transfer payments, and even with most of the 2001-03 tax cuts being kept – the US economy will soon experience serious fiscal drag just when it needs a further boost. Problematically, the administration’s failures leave it relying on the Fed, which is bent on further QE, likely to be announced next Wednesday. But studies show this will have little effect on US growth in 2011, so fiscal policy should be doing some of the lifting to prevent a double dip recession.

In an ideal world Mr Obama would also have been able to move towards reforming and reducing entitlement spending, with commitments to measures that could be phased in over the next few years, therefore avoiding short-term fiscal pain. He would also have committed to increase, gradually over the next few years, less distortionary taxes such as a VAT and a carbon tax. This would have reduced the fiscal deficit, and created a climate in which no investor would worry about additional stimulus.

Sadly, this has not happened. In fact the opposite will now take place. The term stimulus is already a dirty word, even within the Obama administration. After the Republicans make significant electoral gains further stimulus is even less likely. Medium-term consolidation, meanwhile, will be all but impossible as the 2012 presidential election begins to loom large.

In truth the only window of opportunity is 2011. Here the president deserves credit for setting up a bipartisan debt commission, which is most likely to propose a sensible combination of entitlement spending cuts and increases in taxes. But sadly the chance that these recommendations will be implemented in 2011 is close to zero. Republicans will veto any tax increase, while Democrats will resist unpopular entitlement reform.

Read more: http://www.ft.com/cms/s/0/dd140d16-e2c2-11df-8a58-00144feabdc0.html

[DonCoquixote]

1. " a sensible combination of entitlement spending cuts and increases in taxes."

Translation, kill social security.

[Jackpine Radical]

2. All the wrong solutions.

VATs are regressive, for starters. Second, the last place to cut are things like entitlements and Social Security. What better way to infuse money into the economy than to modestly increase SocSec checks? Sure, McCain will get an increase in his SS check, but that's fine because for every McCain there are 100,000 old people with little money who will tend to spend their increases, thereby improving both their own conditions and the retail economy.

People will feel different about the concept of a "stimulus" if it ends up stimulating them.

[spanone]

3. amen JR