President-elect Barack Obama has named Nancy Killefer to the newly created post of “Chief Performance Officer” in the Office of Management and Budget. This appointment comes on the heels of some new deficit numbers that appear to be shocking even to the U.S. Congress. From the Washington Post:

The nation’s budget deficit will soar to an unprecedented $1.2 trillion this year, congressional budget analysts said yesterday, a startling tide of red ink that could dampen enthusiasm on Capitol Hill for some of President-elect Barack Obama’s most ambitious priorities.

Killefer’s appointment appears to be designed to show a good faith effort to wring unneccessary spending out of the federal budget.

“In order to make these investments that we need, we’ll have to cut the spending that we don’t, and I’ll be relying on Nancy to help guide that process,” Obama said. He said Killefer, a senior director in the Washington office of McKinsey & Co., “is an expert in streamlining processes and wringing out inefficiencies so that taxpayers and consumers get more for their money.”

A new Congressional Budget Office report points to a very dire fiscal outlook for Congress:

The picture it paints is bleak: The CBO predicts that the recession that began in December 2007 will extend well into this year, driving unemployment to more than 9 percent by early 2010. (The unemployment rate is currently 6.7 percent.) Plummeting home prices, which touched off the panic in financial markets last year, are likely to fall another 14 percent by 2010, and foreclosure rates are likely to remain high. As a result, federal tax collections are expected to drop by $166 billion this year.

Government spending, meanwhile, is expected to skyrocket to nearly 25 percent of the economy, the report says, “a level exceeded only during the later years of World War II.” One of the biggest expenses will be the estimated $240 billion to incorporate mortgage-finance giants Fannie Mae and Freddie Mac into the federal budget. The twin firms were taken over by the government in September.

Obama, in response to a news conference question, opened the possibility of having specific proposals ready to curtail the explosive growth in social security and medicare spending. He did not offer specifics. I did a post a couple of days back on the deficit, and I did include some data from the Wall Street Journal on Social Security and Medicare:

The projected cash flow deficits in these two programs are staggering. For Social Security, the trustees estimate the 75-year burden on general revenues at $6.7 trillion. For Medicare the comparable burden on general revenues is $24.2 trillion, even after allowing the current transfers to grow with the economy. Thus the total burden these programs will impose on federal finances over the next 75 years is $31.9 trillion, more than six times the current outstanding federal debt. Looking beyond 75 years into the indefinite future, the combined long-run funding gap for Social Security and Medicare is $74.8 trillion in today’s dollars.

Members of Congress will not have to wait long to experience the practical effects of all of this. Until a few years ago, Social Security and Medicare were taking in more than they spent, on the whole. Thus they provided revenue for other federal programs. That situation is now reversed, and last year the combined deficits in the two programs claimed 5.3% of federal income tax revenues. In 15 years these two programs will require more than a fourth of income tax revenues: In other words, in just 15 years the federal government will have to stop spending one out of every four non-entitlement dollars in order to balance the budget and keep its promises to the elderly.

Obama has given a nod to those who recognize the reality of the current need for increased government spending to prop up our economy, but realize that you cannot deficit spend forever. And the New York Times, in highlighting Obama’s promise to reform entitlement spending, points to the obvious difficulties.

Speaking at a news conference in Washington, he provided no details of his approach to rein in Social Security and Medicare, which are projected to consume a growing share of government spending as the baby boom generation ages into retirement over the next two decades. But he said he would have more to say about the issue when he unveiled a budget next month.

Should he follow through with a serious effort to cut back the rates of growth of the two programs, he would be opening up a potentially risky battle that neither party has shown much stomach for. The programs have proved almost sacrosanct in political terms, even as they threaten to grow so large as to be unsustainable in the long run. President Bush failed in his effort to overhaul Social Security, and Medicare only grew larger during his administration with the addition of prescription drug coverage for retirees.

I do not have any deficit rants in me today, but I find it promising that the incoming Administration has at least given a nod to what I consider to be the correct fiscal message. As always the devil lies in the details. The Washington Post editorial on deficits confronts the fact that this problem is difficult, but must absolutely be solved.

According to a recently published International Monetary Fund paper, appropriate measures include increased transfers or temporary tax cuts to consumers at the bottom and middle of the income scale; aid to state and local governments; and repairs and improvements (especially energy-saving ones) to existing infrastructure. The IMF recommends against increasing the federal payroll, cutting corporate tax rates or letting companies deduct their recent losses against past years’ profits. The stimulus plan should include a plan for offsetting spending cuts and revenue increases once the economy recovers.

I have posted the full I.M.F. white paper below.

http://services.brightcove.com/services/viewer/federated_f8/1155201977
imf-position-paper-stimulus