Santa Has To Bring A Reality Check

Being Santa Claus is fun. Delivering the credit-card bills later is much less fun.

And so it will be for U.S. President-elect Barack Obama. He will get to play Santa Claus at the outset of his term, telling people they can spend hundreds of billions of dollars in the name of stimulus. Later, of course, he'll have to play Scrooge, telling the country that the bill has come due.

The challenge for the Obama team is making sure Americans in general, and Congress in particular, remember that both roles lie ahead for the new president. The task, in the words of one senior Obama aide, is to make sure that people don't think the model for stimulus spending in coming months is 'backing in the Brink's truck and opening up the door.'

More broadly, Mr. Obama's team needs to figure out whether there are steps it can take at the outset to build its credibility on fighting deficits in the long run, even as it accepts them in the short run. Such measures are possible and would help calm financial markets as red ink spreads.

If you listened closely to Mr. Obama over the weekend, you could hear him warning people that big spending to stimulate the economy -- and 'big' now means a stimulus package something in the order of $500 billion by most estimates -- shouldn't mean mindless spending.

First, the stimulus message: The need for a big economic jolt means 'we can't worry short term about the deficit,' Mr. Obama said on NBC's 'Meet the Press.' 'We've got to make sure that the economic stimulus plan is large enough to get the economy moving.'

Then, the cold-water message: 'We are not going to simply write a bunch of checks and let them be spent without some very clear criteria as to how this money is going to benefit the overall economy and put people back to work,' the president-elect told reporters. The new administration's plans will be based on what is 'going to make the biggest difference in the economy and what will have some long-term benefits.'

In other words, if the country is going to spend hundreds of billions of dollars on economic stimulus, it should have something to show for it when the crisis ends. Hence Mr. Obama's emphasis over the weekend on spending on 'infrastructure' -- build roads, modernize schools, expand Internet access, improve buildings' energy efficiency, put better technology in hospitals.

That's an attempt to frame how money will be spent. But how do you show seriousness about the budget deficit amid that spending?

Right now, the twin towers of stock-market declines and job losses have produced a remarkable bipartisan consensus that this simply isn't a time to worry about the deficit. As a result, Mr. Obama has the closest thing anyone in his job ever gets to a blank check. He thus has been given an enormous opportunity to shape the nation's priorities at the very outset of a presidential term, one probably matched only by the opening Franklin Roosevelt had in taking office in the depths of the Depression.

In fact, this opportunity is very much shaped by the experience of the pre-Roosevelt Depression years, when worrying about the budget deficit in a time of economic collapse had catastrophic results.

So the Obama team believes that for the next 18 months or so, it would be a mistake to let deficit concerns steer government fiscal policy. In that period, the deficit will rise to levels that once would have seemed alarming.

The $455 billion deficit for the fiscal year that ended Oct. 1 already is the largest on record in dollar terms. As a percentage of gross domestic product, though, it amounts to 3.2%, less than at the peak of the 1980s downturn.

But the deficit will be a lot worse next year, likely reaching between $750 billion and $1 trillion, depending on how costs of the financial-sector bailout are accounted for. The only real question is whether the deficit, as a percentage of GDP, cracks the postwar record of 6% set in 1983. If the red ink hits $900 billion or so, it will.

The Obama team's best guess is that, though stimulus spending will be spread over the first two years of the new president's term, the deficit will hit the high-water mark in the first year, with economic improvements in 2010 generating government revenue that starts to gradually bring it back down. If the Obama team gets lucky, and the government can start selling at a profit some of the assets it's buying up to rescue the financial system, the decline could be faster after that.

But counting on luck alone won't be sufficient. Wide deficits risk pushing up interest rates, interfering with the economic recovery down the road.

One possibility: The Obama team and its Democratic allies in Congress could resolve to work into their initial economic package some long-term deficit-reduction measures that automatically kick in later, ensuring spending cuts or revenue increases as the economy recovers. That would help give the new team credibility on the deficit, even if everyone else in Washington agrees to ignore it for now.

Gerald F. Seib