Only two months old, the presidency of Barack Obama already has a dominant theme. It rings out in nearly every public address, comes up in almost all his media interviews, and even graced the cover of his first budget. "A New Era of Responsibility," he called the document.
In this new era, everybody must begin to account for his or her behavior. Wall Street executives cannot get fat on paper profits from powder-keg transactions. Government regulators cannot take long lunches to toast the invisible hand. Investors cannot expect new bubbles to bailout their busts. Congress cannot send home boondoggle pork projects while whining about government spending. And the President of the United States shall no longer have the liberty to dodge the big issues. He will have to lead by example and make the hard choices. (See who's who in Obama's White House.)
"Everyone in this chamber Democrats and Republicans will have to sacrifice some worthy priorities for which there are no dollars," Obama told Congress, in one typical expression of the Responsibility Era. "And that includes me."
So it was jarring news Friday, when the Congressional Budget Office (CBO) released its preliminary analysis of Obama's plans for the nation. In one of the first non-partisan, independent reviews of his administration's economic vision, the Obama White House pretty much got a failing grade not because the President's advisers were bad at math, but because the CBO found that the economy is expected to recover so slowly as to make the Obama policy proposals unsustainable. The new "Era of Responsibility," it turned out, runs into big trouble with just a slight long-term decline in economic projections.
According to the Congressional bean counters, the economy is likely to grow at a slower rate than Obama had projected when the budget was drafted, and than several other economic forecasts anticipate. Under the Administration's plans, that means an explosion in government debt after the current recession ends, with sustained deficits even larger than the ones caused in the 1980s by the policies of Ronald Reagan. The national debt, the CBO calculated, would go from 41% of the size of the nation's economic output in 2008 to 82% of the economic output in 2019. In other words, if the CBO estimates play out without a change in policy, Obama is on track to accomplish exactly what he promised to change during the campaign, creating a massive burden for the next generation to fund politically popular policies in the short term, like tax cuts and spending programs. (Read "How to Understand a Trillion-Dollar Deficit.")
To be fair, it is unlikely that this is the route that the president will ultimately take. For starters, the CBO projections, on out years, have a significant built-in margin of error. Still, in an interview Friday, Peter Orszag, Obama's Budget Director, admitted that long-term deficits projected by the CBO "would lead to rising debt-to-GDP ratios in a manner that would ultimately not be sustainable." He was not alone. As soon as the report came out, even Democrats who support the President's policies said that the budget would have to be rethought. "We have got to get back to a more sustainable fiscal circumstance," said Sen. Kent Conrad, the Democratic chairman of the Senate Budget Committee on ABC's This Week. "We cannot have debt pile on top of debt."
Congress and the White House now face a limited set of options, especially as they struggle to maintain the president's priorities, which include more spending for education, health care and energy reform. They can pare back the spending plans, propose further tax increases, or hope that the CBO got the projections wrong and the economy does not deteriorate any faster than already expected. "I think it's easy to exaggerate fluctuations in the deficit projections, which are driven by small changes in underlying assumptions," Orszag told reporters. "I also recognize that despite that, the CBO numbers are going to be the basis for the budget resolution."
The devil, in other words, will be in the details. There are early indications that Obama will have to sacrifice more of his own "worthy priorities" to maintain a responsible budget. For weeks, Obama's economic advisers have been repeating the mantra that times of crises are times of opportunity. It is a thesis well founded in Keynsian economics, since the federal government has great incentives to stimulate the economy by taking on more debt during downturns. About a month ago, a senior administration official explained the dynamic this way. "It's actually easier to do expansive economic policy in a recession," the official said, in a statement that is widely accepted by economists. "The existence of a large pool of unemployed people creates as close [as] economics ever has to the possibility of a free lunch for economic policy."
But that "free lunch" ends, according to those same economic theories, as soon as the economy recovers, and sustained deficits revert to dangers that can damage economic growth. "In terms of getting our act together, we are certainly going to be facing the longer term in a bad position," said Alan Auerbach, an economist at U.C. Berkeley, about the latest round of CBO estimates.
And so Obama's central theme is being tested. The discussion is now likely to return to the promise Obama made last month, when he told Congress that he was willing to "sacrifice some worthy priorities" to make his budget responsible. White House aides say that the president has already made significant sacrifices by scaling back his campaign promises in the current budget. To make the numbers balance under a rosier outlook, Obama shrunk the size of the "Make-Work-Pay" tax credit by 20%, to $800 per family. He slowed down his foreign aid spending plans, scrapped a plan to reduce income taxes for the elderly, and proposed higher taxes for wealthy taxpayers who make charitable contributions.
Those measures created a budget that was arguably sustainable once upon a time, with deficits that were smaller than the projected annual growth in the economy, while Obama still managed to make significant investments in education, energy and health care. But the economy appears to be shifting. And unless Obama finds a way to shift as well, or the economy recovers in a way some economists now think unlikely, Obama's new "Era of Responsibility" may be viewed by historians as no more than another predictable attempt by a political leader to repaint the sides of a sinking ship.