TARP, the much-derided Troubled Asset Relief Program, has an odd structure. $700 billion in expenditures were authorized, but the program was structured such that much of the money would be paid back—some with profit—and indeed a lot has been paid back. Consequently, the executive branch has the ability to either make the net cost of the program much less than $700 billion or else to in effect spend the same money twice. In principle, this could have been a good way to get additional stimulus into the economy without additional legislation. Leftover TARP money and TARP repayments could be used, for example, for small business loans to support entrepreneurs looking to expand their operations.
Instead, Deborah Soloman and Jonathan Weisman report that the White House is considering letting short-term political optics dictate policy:
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.
They say that the idea “is still a matter of debate within the administration.” Let’s hope they reject it. There is one and only one good reason to prioritize short-term deficit reduction, and that’s if you believe that prioritizing short-term deficit reduction will improve economic growth. We know from previous reporting that nobody on the White House economic team believes that this is the case. The pressure to look at deficit reduction is political pressure, “pressure to show it is serious about tackling the budget deficit.” In brass tacks political terms, however, a substantial deficit in 2010 is inevitable either way. The question is whether it’s a substantial deficit that voters will find forgivable thanks to the robust economic recovery and falling unemployment, or if it’s a substantial deficit that voters deem intolerable thanks to an anemic recovery and high, flat unemployment. The politics here are all about getting the policy right.
Realistically the best use of these funds might be semi-corrupt pork barrel projects designed to persuade key legislators to stop threatening the country with a debt default and start voting “yes” on key legislation. We could build a giant golden calf in Indiana in place of the false God of fiscal austerity. And as I’ve had occasion to note in the past, the administration has arguably been too eager to ask what substantive policy concessions Olympia Snowe wants and unduly reluctant to ask what our country can do for the lobster industry. Contractionary fiscal policy would be an extremely costly way of buying congressional breathing room.