Both candidates face deficits, economists say

Braun is a Times staff writer.

Despite harsh scrutiny from economic analysts, Barack Obama and John McCain remain reluctant to admit what is becoming obvious -- that the nation’s economic crisis will take a heavy toll on their ambitious tax and spending plans.

On his website, Obama says the nation’s debt is a “hidden domestic enemy” that he pledges to combat. But in recent days, the Illinois senator and his economic advisors have begun to gingerly inch toward an acknowledgment that the rising costs of the Wall Street rescue plan and his promises of middle-class tax relief and other initiatives are likely to lead to a spike in deficit spending over the next several years.

During the final presidential debate, Obama repeated his analogy of using a “scalpel” to offset his spending initiatives with budget cuts. But the Democrat warned of the limited choices facing the next occupant of the White House.

Obama’s chief economic advisor, Jason Furman, was more explicit during a conference call this week. “The top priority would be to avoid a deep recession,” he said -- suggesting a strategy that could require costly efforts to jump-start the economy.


McCain has not budged from his insistence that he can balance the budget within four years. The Republican Arizona senator has said his plans for new corporate tax cuts would be offset by an across-the-board spending freeze.

But a growing number of economists, including some free-market-oriented experts, say the nation faces massive deficits over the next several years no matter who is elected president.

“Both candidates have a deficit problem that neither of them wants to admit,” said J.D. Foster, a senior fellow at the conservative Heritage Foundation in Washington. “They’re relying on an awful lot of hand-waving to get budget-neutral, but I think it’s pretty clear that either of them will be constrained at least over the next two years by pressure to fix the economy.”

The nonpartisan Committee for a Responsible Federal Budget estimated recently that the $700-billion economic rescue plan aimed at salvaging the troubled U.S. banking system would push the nation’s deficit to more than $1 trillion in the coming fiscal year.

That would be a huge increase from the $482 billion that the White House projected this summer, which itself would be a record.

Facing such a steep wall of debt at the same time the economy is teetering would hamstring any immediate efforts to balance the budget, leading economists predict.

“It’s highly likely we’re already in a recession,” said Alan J. Auerbach, director of the Robert D. Burch Center for Tax Policy and Public Finance at UC Berkeley.

“That suggests policies aimed at short-term help for the economy will have much greater importance than concern about the deficit.”


Free-market advocate Alan D. Viard, a former senior Federal Reserve Bank economist and resident scholar at the American Enterprise Institute, agreed that “in either case you will have demands on government resources that will crowd out the amount of money available -- whether it’s for reducing tax rates, as McCain wants, or adding programs, as Obama wants.”

And even long-term prospects appear bleak that either McCain or Obama could easily regain control over the deficit -- assuming they hold fast to the tax and spending proposals they continue to defend on the campaign trail.

The Congressional Budget Office predicts a deficit of $147 billion in 2013.

That estimate does not account for the massive bank rescue package and the earlier bailouts of investment bank Bear Stearns Cos. and insurance firm American International Group Inc. -- deals that could provide a healthy return to U.S. taxpayers or could worsen the nation’s long-term debt.


In a recent study, the Committee for a Responsible Federal Budget laid out how much the presidential candidates’ spending and tax-cut proposals would add to the federal deficit in 2013.

McCain’s proposals for major new corporate tax cuts and other expenditures would add $211 billion to the $147-billion projected deficit, said Maya MacGuineas, president of the watchdog group.

Obama would raise the CBO’s projected deficit by even more -- by $286 billion -- if the government adopted his program of middle-class tax cuts, a healthcare insurance program, and boosted energy and infrastructure funding, MacGuineas said.

Those estimates do not include the newly tweaked efforts by both candidates to provide an economic stimulus package.


Obama recently pressed a $60-billion plan of middle-class tax cuts and public works jobs, while McCain countered with a $52.5-billion proposal that included deeper capital gains tax cuts and loosened rules for withdrawing money from retirement accounts.

In the face of those projections, determination to rein in deficit spending will not be enough, said Rudolph G. Penner, who was director of the CBO in the mid-1980s.

“The promises of both candidates are in serious trouble,” said Penner, who is with the centrist Urban Institute, a nonpartisan research center on social and economic policy.

“Both of them are already underwater about the deficits they would face even without the bailout,” he said. “And with the bailout, it’s clear they will have to adjust their promises. But we’re not hearing anything close to that from either of them.”