WHITE HOUSE SENDS SIGNALS ON DEFICIT / THE WALL STREET JOURNAL

CAPITAL JOURNAL

JUNE 12, 2009

White House Sends Signals on Deficit

By GERALD F. SEIB

Think of the federal budget deficit as a nasty virus lurking inside President Barack Obama's plans, threatening both his efforts at economic recovery and his broader agenda. This virus will need long-term treatment -- years of it.

But the deficit also is becoming a significant short-term psychological problem that the administration has to deal with now. Put simply, if the administration can't convince the financial markets, the Congress and the public that it really, truly will cut into the deficit over time, even if it can't do so for a while, the long-term economic and political problems get a lot worse.

This week the warning signs began popping up. In financial markets, long-term interest rates rose to their highest level of the year, at least in part out of concerns over big government borrowing in the years ahead, raising a new threat to recovery in the housing industry.

And on the political side, Republicans showed they think the deficit is an issue they can use to good effect to attack the president. Sen. George Voinovich of Ohio, a longtime scold on fiscal responsibility, took to the Senate floor Wednesday to declare that Mr. Obama "must not be serious about addressing the growing national debt, or worse yet doesn't understand the fiscal crisis we are in, or even worse than that he just doesn't care."

All this is hardly lost on the president and his aides, of course, so they also have been busy this week trying to counteract any notions they are complacent about a projected $7 trillion in deficits over the next decade, even as they disperse billions of dollars to stimulate the economy and rescue the financial system.

First, Mr. Obama Tuesday called on Congress to pass legislation enshrining "pay-go" budget practices that require lawmakers to find a dollar of savings or taxes for every new dollar spent. (Skeptics, some within the president's own party, immediately noted that the proposal came with a multitrillion-dollar loophole because it would exclude from pay-go rules Medicare payments to doctors, changes in the estate and gift taxes, the Alternative Minimum Tax and extension of the Bush-era tax cuts.)

At the same time, the White House is preparing a plan to squeeze billions of additional dollars out of Medicare costs, which are the cause of so many long-term deficit woes. That comes a few weeks after Mr. Obama ordered cabinet members to find $100 million in administrative savings in their budgets, and pledged to find bigger savings elsewhere, a step that proved too token to have much psychological impact.

As all that suggests, the administration is embarking on some serious signal-sending to convince the world that it's on the case and committed to at least keeping the deficit as a share of gross domestic product to historically acceptable levels.

"I think we have been careful from the beginning to highlight that in the midst of a dangerous problem you need fiscal stimulus, but that in the long run the debt-to-GDP ratio has to be on a sustainable path," says Lawrence Summers, head of the White House's National Economic Council.

Administration officials also insist that the recent bond-market move to push up interest rates is less rooted in fears about government spending than some claim. The increases are as much the result of a belief that economic recovery is happening faster than expected, they argue, noting that the stock market and interest rates are rising in tandem.

"The journalistic narrative on the increases in interest rates" has "given more weight to concerns about the deficit" than is justified, argues one senior administration official.

In any case, officials say they recognize more will be needed over time. Eventually, the president will have to propose ways to hold down Social Security costs. And Obama aides continue talk of an eventual tax-reform plan that will generate more revenue.

But the big elephant in this room is health care. In the eyes of most Obama aides, the most important deficit-fighting measure of the next few months is the effort to pass a health-care overhaul that expands coverage without costing more federal dollars, and that makes systemic changes that hold down overall health costs.

The federal government, as the nation's single biggest buyer of health care, has more at stake in cost containment than anybody else. "We are addressing health care...because if you don't address that, you're on an unsustainable path on deficits," says Peter Orszag, the head of the president's Office of Management and Budget.

Mr. Obama was even more succinct in a Wisconsin appearance Thursday. Talking about inflation in health costs, he said simply: "If we don't get a handle on it, we're not going to be OK."

Write to Gerald F. Seib at jerry.seib@wsj.com

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved