If Obama's tax cuts eat into stimulus spending, what goes first?

[Stephen Baker]

I'm assuming that if Obama cuts taxes by $300 billion, stimulus spending falls. For starters, I'd be happy if Obama and Co pulled the plug on ethanol investments, which barely replace a drop of oil. Are there other infrastructure/stimulus projects which should be cut? Highways that shouldn't be repaved? Waste in winterization projects? Mob museums? All ideas welcome.

[Susan Kuhn Frost]

BUT: Dig deeper...I'm certainly not an expert, but the econo-blogs I read say that the game has changed considerably since last fall. As I understand it, Bernake now has the authority to issue a form of financial instrument and expand the money supply with no check/balance...thus expanding the funds in the hands of government. The old debt ceiling doesn't apply to what he can do. And since money is fungible....I think we are dealing with a government that essentially will use any means available to pump cash into the economy, including just printing it. The blogs I rely on most are Calculated Risk and Global Economic Trend Monitor....there is an interesting story here about the role of the Fed in all of this....I think that story deserves to be told in a lot more detail.

[Stephen Baker]

I'm not an expert in this, but I think we're talking about two different things, monetary and fiscal policy. Bernanke handles the monetary, but for Obama's spending the government will need to run deficits and borrow money, right?

[Susan Kuhn Frost]

What will happen is that the Bernake will increase the money supply so that stimulus spending will not fall. Dangerous move long term, but clearly one that Bernake is prepared to make. There won't be much fiscal discipline for the next year or two.