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Obama To Use TARP Money To Lower Deficit?

Despite tea partiers and many liberals savaging President Obama for bailing out the banks, for the most part this has been the province of the Federal Reserve. The Obama White House actually hasn’t used most of the TARP money inherited by them from the $700 billion dollar bailout passed by Congress in 2008 and signed by President Bush. At last count over $210 billion remained, with another $50 billion expected to come back in over the next year.

There was discussion a few weeks ago of Obama using that money to give to community banks for the purposes of lending to small businesses, which could create jobs and finance new projects. With a lending drought continuing, this seemed like an excellent idea. However, today the White House floated a different plan, taking over half the remaining TARP money and just plugging it back into the budget to fill the deficit.

The Obama administration, under pressure to show it is serious about tackling the budget deficit, is seizing on an unusual target to showcase fiscal responsibility: the $700 billion financial rescue.

The administration wants to keep some of the unspent funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter. It is also expected to lower the projected long-term cost of the program — the amount it expects to lose — to as little as $200 billion from $341 billion estimated in August.

The idea is still a matter of debate within the administration and it is unclear how much impact it would have on the nation’s mounting deficit levels. Still, the potential move illustrates how the Obama administration is trying to find any way it can to bring down the deficit, which is turning into a political as well as an economic liability.

Actually, it’s ONLY a political liability, and only among deficit scolds. Among serious economists, it’s well-understood that job loss can only be staunched by continued public investment. Even indirect investment like a small-business lending program could create jobs. But socking away hundreds of billions of appropriated dollars when the economy is still struggling is reckless and smacks of nobody as much as Hoover.

Holding a jobs summit and talking about “getting America working again” won’t do anything to the unemployment rate. Transforming the economy will, and that requires some public investment. Right now job loss remains too high to retract back to fiscal austerity.

Politically speaking, this could be a nod to the deficit scolds who have threatened to throw the nation into default unless they get a commission to cut Medicare, Medicaid and Social Security to the bone. Perhaps using TARP money to pay down the deficit will calm them.

But that answers a political question, not a policy one. And it won’t matter that the White House will avoid a “tax and spend liberal” label, which Rahm Emanuel says in this Wall Street Journal piece (and to believe that, you’d have to think that Republicans make their charges based on facts), if unemployment is still at double digits next year. The other nugget in this article is a proposed budget freeze or even cut:

The White House is in the early stages of considering what bigger moves it might make for next year’s budget. The Office of Management and Budget has asked all cabinet agencies, except defense and veterans affairs, to prepare two budget proposals for fiscal 2011, which begins Oct 1, 2010. One would freeze spending at current levels. The other would cut spending by 5%.

OMB is also reviewing a host of tax changes. The President’s Economic Recovery Advisory Board will submit tax-policy options by Dec. 5, including simplifying the tax code and revamping the corporate tax code.

Presidential budgets actually mean little, in the end. But the mentality of fiscal austerity at a time when public investment is still necessary is extremely distressing.

UPDATE: Matt Yglesias has a good perspective on this.

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David Dayen

David Dayen