Obama vs. the Bond Market Vigilantes

Is Obamanomics compatible with a $700 billion budget deficit?

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Team Obama has made it clear that a President Obama would place greater priority on America's "investment deficit" (spending on energy, infrastructure, and education) in his first term than the budget deficit. So Obama would not be under any self-imposed pressure to dramatically cut the deficit or balance the budget. But I think that could change.

The White House is predicting about a $500 billion budget deficit next year. Many budget experts think that number could be more like $600 billion. Add in a Fannie and Freddie bailout/second stimulus package and a slightly worse-than-expected economy, and you are quickly talking about a $700 billion shortfall. Even worse, a mega-bailout for the banking industry could tack o n another $500 billion or more. (Plus, the $700 billion number would be more like $1 trillion if Social Security surpluses weren ' t being used to mask its true size. ) Now , $700 billion is a big number— about 5 percent of GDP. We're talking about the level of budget shortfall that was last seen during the 1980s, when Democrats attacked President Reagan for being fiscally irresponsible.

I'm not sure the financial vigilantes in the global equity, currency, and bond markets would let him get away with that—unless Obama also managed to somehow put entitlements on a fiscally sustainable path that didn't harm the economy. It also remains to be seen whether Obama's economic agenda would itself add to the deficit. The campaigns would disagree, but budget experts don't think either Obama's or McCain's budgets add up. This from the Tax Policy Center:

Under either Senator Obama's or Senator McCain's plan, however, the debt would likely continue to rise as it has over the past eight years, even under the CBO's relatively optimistic assumptions about spending. Senator Obama's plan would add $3.5 trillion to the national debt (including additional interest costs) while Senator McCain's plan would add $5.0 trillion.


TAGS:
Obama, Barack
bonds
deficit and national debt
2008 presidential election

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