Obama dealing with an intractable budget problem

Some folks are showing a great deal of concern about the federal deficit all of a sudden. I don't know why they didn't think of that when the Bush administration decided to permanently run the government on borrowed money.

But, hey, anything to beat up on President Barack Obama.

A little perspective: The Congressional Budget Office projects the deficit for fiscal year 2010 to be $1.3 trillion. That's $100 billion less than last year's deficit. So, there is some improvement. But why is the deficit so big in the first place?

First, tax revenues in 2009 were $420 billion less than in 2008. And the costs of the wars were put on budget for the first time. And we added Bush's bank bailout and Obama's "stimulus package."

There are two components to the deficit: The structural deficit, which is preplanned, and the cyclical portion, which is due to the recession. As the economy recovers, tax revenues will return to normal. The stimulus spending and the TARP program will expire, and we will be left with only the structural deficit.

Why doesn't the administration cut the deficit now?

Because it's impossible.

This year's deficit is 9 percent of GDP. Suppose we decided to cut it to, say, 7 percent of GDP. The fiscal multiplier (the change in GDP caused by a change in government spending) is about 2. So, if we cut government spending by 2 percent, the economy will shrink by 4 percent. According to an economic rule of thumb called Okun's Law, this will cause unemployment to increase by 2 percent. That is, another 3.5 million workers will lose their jobs. Tax revenues will drop. The deficit will be worse and even more people will be unemployed.

The problem isn't that government is spending too much. It's that consumers are spending too little.

In order to cut the deficit, we need consumer spending and investment to grow enough to offset any tax increases or government spending cuts. Until we have sustained private sector growth, we can't do much about the fiscal deficit.

To the extent that we need any more fiscal policy, it needs to be focused on creating jobs. Millions of construction jobs aren't ever coming back. We need to find work for those folks to do.

The rhetoric about big spending and "socialism" is over the top. Obama is no more socialist than President Dwight D. Eisenhower. He's just stuck with an intractable budget problem.

I'm sure that the same folks who are sounding the alarms about deficit spending now will be the first to start whining when the inevitable spending cuts or tax increases come along.

Dallas Dunlap

Brooksville