STANFORD, Calif. -- Barack Obama will likely be forced to scale back his spending plans and perhaps slow his middle-class tax cuts next year because of massive deficits from the recession and the economic bailout.
That is the prediction from top economists and budget analysts here at the Hoover Institution who have been tracking the worsening recession. Their forecast: sharply higher government deficits from plunging revenues that will severely constrain the incoming president's ambitious agenda.
Obama's problem: He has exaggerated the revenue his tax increases would bring in and underestimated what his healthcare and other social-welfare programs would cost.
"It's a given that Obama will not be able to achieve all that was promised in light of the fiscal situation that he is walking into," said John Cogan, a Hoover economic analyst and professor of public policy at Stanford University and a top budget adviser in previous Republican administrations.
"We've seen just how hard it is to maintain these pay-as-you-go rules where every additional expenditure needs to be financed with higher taxes," Cogan said. "And Sen. Obama is going to face exactly that problem, so it will be very hard to finance the kind of change he talked about in his campaign."
The
weakening economy and unprecedented deficits could also impede his plans to raise taxes on wealthier Americans and give refundable tax cuts to low- to middle-income workers, Cogan told me.
"I think it might delay some of his tax increases and stretch out some of the tax cuts," he said.
Cogan figures Obama will be facing a budget deficit of $600 billion on the day he takes office in two months -- a sea of red ink that could easily grow to $1 trillion by the end of the 2009 fiscal year.
"He needs to scale back what he's proposed. If he tried to adopt them as proposed, they would cost much more, raise considerably less, increase the budget deficit, and accomplish less," said Hoover economist Michael Boskin, who chaired the Council of Economic Advisers under President George H.W. Bush.
Like other conservative economists at Hoover, Boskin believes higher tax rates -- especially Obama's plans to raise investment taxes on capital gains and dividends -- will hurt economic growth.
"It's rarely wise to raise taxes but especially foolish to do it when you know you are in a deep recession," he said.
Asked whether he knew of an economic model where raising taxes in a recession had worked, Boskin said, "I don't know of one.
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