First, Washingtons access to the huge sums it will need to continue borrowing to deal with the economic downturn will be helped immensely if the bond market believes its borrowing needs will be less in the not too distant future. Increasing the markets confidence in the federal governments willingness to deal with the deficit by making it clear that fiscal as well as monetary policy is ready and willing to deal with the inflation concerns that have been expressed in recent weeks should also have some positive impact on the interest rates the Treasury currently is paying.
Second, the Obama administration has to begin to make good on what up to now has been a promise to Blue Dogs and other fiscally conservative Democrats that deficit reduction will move from the back to the front burner when the economy allows it. The Blue Dogs so far have been willing to go along with what President Barack Obama has asked of them, including supporting the fiscal 2010 budget resolution and the stimulus bill, based on several important but nonetheless largely symbolic gestures. The most prominent of these was the fiscal responsibility meeting held at the White House three days before the Obama budget was released. To maintain the Blue Dogs support, which will be critical during the upcoming debate on health care, those gestures now need to start to be replaced with something more concrete.
Third, if the unambiguous signs that the economy has recovered exist in 2010 as many now expect they will, the biggest economic issue going into the Congressional elections may well be federal borrowing, interest rates and inflation, and the deficit will be blamed for everything considered wrong with any or all of them. That makes it imperative that Congressional Republicans and Democrats start to move quickly to stake a claim to deficit reduction if the issues that may be dominating the business and financial headlines when voters next go to the polls are all blamed on too much red ink.
Finally, the Obama administration needs to start talking seriously about the deficit now because, assuming the strength of the economy is no longer an issue at that point, the deficit could easily be the most salient economic issue when the president runs for re-election in 2012. By that point, the presidents promise to begin to reduce the deficit will have had two real tests the fiscal 2011 and 2012 budget debates and Congress will be debating his 2013 budget while the campaign is happening.
At that point, the deficits the administration promoted to deal with the economy are likely to be seen primarily as problems he caused if he hasnt already taken steps to deal with them. Moving now to claim the issue and make some real progress will be the best way for the White House to avoid the political problems that will likely otherwise exist.
Stan Collender is a partner at Qorvis Communications and author of The Guide to the Federal Budget. His blog is Capital Gains and Games.