Should the Bailout Reduce Other Government Spending?

The most annoying part of the first presidential debate, for me, was when the moderator, Jim Lehrer, asked the same question three times. Basically, he said that if you're spending $700 billion on a financial bailout, then you're going to have to cut back somewhere else:

And what -- and the first answer is to you, Senator Obama. As president, as a result of whatever financial rescue plan comes about and the billion, $700 billion, whatever it is it's going to cost, what are you going to have to give up, in terms of the priorities that you would bring as president of the United States, as a result of having to pay for the financial rescue plan? ...
Are you -- what priorities would you adjust, as president, Senator McCain, because of the -- because of the financial bailout cost?
But if I hear the two of you correctly neither one of you is suggesting any major changes in what you want to do as president as a result of the financial bailout? Is that what you're saying?
Before we go to another lead question. Let me figure out a way to ask the same question in a slightly different way here. Are you -- are you willing to acknowledge both of you that this financial crisis is going to affect the way you rule the country as president of the United States beyond the kinds of things that you have already -- I mean, is it a major move? Is it going to have a major affect?

Larry Summers, today, gives the answer I would have given:

The idea seems to have taken hold in recent days that because of the unfortunate need to bail out the financial sector, the nation will have to scale back its aspirations in other areas such as healthcare, energy, education and tax relief. This is more wrong than right. We have here the unusual case where economic analysis actually suggests that dismal conclusions are unwarranted and the events of the last weeks suggest that for the near term, government should do more, not less...
A family that goes on a $500,000 vacation is $500,000 poorer but a family that buys a $500,000 home is only poorer if it overpays...
The American experience with financial support programmes is somewhat encouraging. The Chrysler bail-out, President Bill Clinton's emergency loans to Mexico, and the Depression-era support programmes for housing and financial sectors all ultimately made profits for taxpayers.

I'm not sure if it would have been politically feasible for Obama to have given this answer: no one running for president wants to sound cavalier about the fiscal consequences of spending $700 billion. But the fact is that those consequences are pretty small, or at least they might well be, if the government buys up the toxic assets at near-market prices. The key task is to structure the bailout legislation in such a way as to minimize the chances of it losing lots of money for the government. If you do that, then you don't need to cut back on much in the way of other proposed programes.

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