Cutting The Deficit While Stimulating The Economy?

It is a noble idea, but it probably will not work.

The President aims to cut the deficit in half by 2013. To accomplish this, he plans to take out of the budget money being spent to keep the military in Iraq.

According to the FT, “Revenue from the sale of emissions permits under a cap-and-trade system will help pay for the deficit reduction, along with reductions in spending on the war in Iraq and higher taxes on wealthy individuals and businesses.”

The goal assumes a number of things which may not happen. The first is that the economy may move out of the recession by 2010, but the hangover for GDP growth and employment could last for several years as consumer and business spending move sideways. Taxing the rich works, if they remain rich. The financial turmoil has almost certain cut into the net worth of America’s most well-heeled.

Almost all of the economic projections for the cost of the stimulus package, the size of the TARP, and the price of the mortgage rescue program are based on an improvement in the economy that begins sometime late this year or in 2010. It also assumes that the recovery will be a “normal” one, meaning that GDP will snap back sharply followed by an increase in employment.

The next recovery may not look like that at all.

Douglas A. McIntyre