As President-elect Barack Obama continues to name members of his cabinet who will have to quickly deal with pressing national and economic security issues, people are beginning to wonder if he will be able to fulfill the promises he made in his campaign.
Now that the U.S. has been officially declared to be in a recession, the question has taken on extra urgency. So far, Obama seems to be attracting praise from both parties for most of the choices he has announced for the Cabinet and other top economic and foreign policy posts.
But while Obama is enjoying a honeymoon period after his election triumph, he will still have to face difficult choices once he gets into office. Among them is what to do about the rapidly growing deficit, which the financial bailout has been exacerbating to an unprecedented degree. Some economists are urging Obama and the current administration not to worry about the deficit while the country faces the threat of a possible economic depression, but others are sounding a more cautionary note.
At a webcast on Tuesday sponsored by the think tank, the Urban Institute, a panel of tax experts debated the topic, “The Audacity of Campaign Promises: The Obama Agenda Meets Fiscal Reality.” They seemed generally skeptical about the incoming administration’s ability to cope with the soaring deficit while trying to revive the economy.
“Some of the TARP and other rescue money will be returned and we may even profit, but the chances of that are diminishing every day,” said Rudy Penner, a senior fellow at the Urban Institute. “The ratio of debt to GDP is going to soar to over 50 percent. While people are not paying attention to the constraints right now, we will see our interest bill going from just under 9 percent to doubling very quickly.”
Some on the panel believe that the sources of foreign capital that have been buying up Treasury notes and helping to prop up the U.S. economy may not last as the economic crunch spreads around the world. Oil profits and trade surpluses are falling, giving some foreign investors less money to put in the U.S. While even domestic investors are fleeing to Treasury notes as one of the few seemingly safe investments right now, that trend could reverse if the Treasury looks like it is making far too many bad investments.
Some on the panel worried that Obama may not be able to fulfill his promise of cutting taxes and he may even need to raise taxes to keep the deficit from soaring further. One suggestion was setting up a value-added tax that would go into effect in 2010. That could encourage more people to buy large-ticket items next year to avoid a heavy tax the following year.
However, raising taxes in the midst of a recession is not going to be an easy sell. As the nation’s governors make their case this week for aid to states trying to plug their budget deficits, they too are struggling with the dilemma of whether or not they can raise taxes without getting thrown out of office. It isn’t likely that the next administration will be able to make that decision lightly either.
