Keynesian quandaries: The debt deal aftermath
Weaknesses on both sides went unexploited by the opposing party
The Stewart-Colbert rally was a good bit of entertainment in and of itself, but the best bit of comedy to come out of it was a video made by a pair of faux reporters who went about asking the rally-goers “Is Barack Obama a Keynesian?” The attendees, unaware of John Maynard Keynes and his contribution to modern macroeconomics, confused Keynesian for Kenyan; hilarity ensued.
The comedians behind the stunt may have wanted their intention to be misread, but these days the question deserves to be asked in a straight fashion. Is Obama a Keynesian?
Once upon a time, the president’s macroeconomic credentials were peerless. He pushed through one of the largest economic stimulus bills in history and was advised by a team of economic heavies, including Christina D. Romer PhD ’85, Paul Volcker, Lawrence H. Summers ’75, Austan D. Goolsbee PhD ’95, Jared Bernstein, and Peter Orzsag. If Jon Stewart fans misheard, who could blame them? No one in their right minds could doubt the president’s Keynesianism.
Obama could have — and should have — gotten more from the debt deal
These days however, even if the president talks big about creating jobs, he has largely failed to deliver. And all those economic heavies who were by his side at the start of the administration have resigned and fled to various think tanks and universities. Like Paul R. Krugman PhD ’77, whose descent from respected trade economist to twice-weekly diatribe author is the stuff of Greek tragedy, Keynesianism seems to have lost its cachet among Washington elites, and nowhere is its absence more conspicuous than in the White House.
The best chance of getting the nation back to work lies in a second stimulus. The first was too timid, too full of pork, too lacking in shovel-ready projects. It was enough to tread water, but not enough to replace the aggregate demand that was lost in the crisis.
At first glance, the debt talks seem like a poor place to propose a second stimulus. If Democrats lost the Keynesian faith, then Republicans never had it to begin with. If Obama suggested deficit budgets in the middle of talks about how to have fewer deficits in the future, maybe Republicans would have laughed him out of the room.
And yet, if there’s one thing Republicans have demonstrated in the past year, it’s that they’re willing to trade anything and everything for tax cuts. Eight months ago, they gave away an extension of unemployment benefits, a nuclear arms treaty, and the repeal of Don’t Ask, Don’t Tell in exchange for just a two-year extension of the Bush tax cuts. Social conservatives and foreign policy conservatives aren’t even in the back seat of the Republican party — they’re locked in the trunk of the car, while tax-cut die-hards, deficit hawks, and small government types bicker over control of the wheel.
The infighting of his opponents left Obama with a golden opportunity for a deal: large tax cuts in the short term, and $4–5 trillion of deficit reduction in the long term, split evenly between revenue increases and spending cuts. Such an offer would have split Republicans and left them without a leg to stand on. Those who preach tax cuts as the key to economic recovery would be hard-pressed to explain a vote against tax cuts. Deficit hawks would struggle to argue against a deal that reduces the debt’s growth by $4 trillion instead of $2.1. And for Democrats, it’s not just a better split between revenue increases and spending cuts than they otherwise would have got, it’s a chance at putting their economic principles into action and passing a second round of stimulus.
But instead of fighting for the policy content that he was elected to deliver, President Obama let the debt talks break down over minutia. Republicans wanted to extend the debt ceiling for a short period, but Obama, afraid of Republicans on debt issues, wanted to push any debt discussions until after the next election.
In exchange for that one condition, Obama gave away everything. He sold out Keynesianism — there was no stimulus at all in the deal. He sold out his party — all of the deal’s deficit reduction will come from spending cuts and none from revenue increases. And he sold out his country — $2.1 trillion of cuts is not enough to save the U.S. government’s bottom line.
In the wake of his faithless performance, the question is begging to be asked: Is Obama a Keynesian? Has he lost his beliefs, or is he simply unwilling to stand for his values when they might conflict with his self-preservation? Is he still the man we elected? Was he ever?
Republicans could have — and should have — gotten more from the debt deal
If Republicans were wondering whether they got enough from Obama in the recent debt negotiations, they got their answer when Standard and Poor’s downgraded the United States’ debt rating. The agency was blunt in its assessment: “The fiscal consolidation plan … falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” The losses on the S&P 500 index hammered home the message: markets were expecting Republicans to get a lot more than they did out of the deal.
On one hand, it’s hard to fault Republicans for achieving such a meager debt deal. They hold only one house of Congress, and President Obama was unwilling to do any debt reduction at all — just six months ago, he proposed a budget that was business as usual, dressed up as austerity through the use of bald-faced accounting gimmicks. Perhaps the market expectations were unrealistic; Obama offered business as usual, the right wing offered a budget with ~$6.2 trillion in spending cuts, and when the two sides met, the out-of-power party got one-third of what it wanted, and the other side got two-thirds. It seems straightforward enough.
On the other hand, there were quite a few reasons to believe that Republicans could negotiate a better bargain. The rise of the Tea Party changed the conversation in Washington. Everyone, Democrat and Republican alike, had to have an answer for how they would cut the debt. Even Obama, responsible for $3.5 trillion dollars of the deficit, was scrambling to position himself as a more serious deficit hawk than any Tea Party standard-bearer.
In that light, slowing the growth of the national debt by a couple trillion dollars over the next ten years is a crushing defeat. The final terms might even be less generous — since so many of the deal’s cuts are unspecified, Republicans could retreat even further and let a majority of the cuts come out of programs they support. What Obama wanted out of the deal he got, and what Republicans wanted they still have to fight for.
Ask a Democrat and they’ll tell you this is how it should be — the debt ceiling is nothing more than just another legislative trick being abused by Republicans, like a filibuster or earmark. True, with a but: the debt ceiling may be mere political artifice — the national accounts are not. While the ceiling can be removed at the stroke of a pen, the federal government cannot simply summon monies out of thin air, and yet, Obama stood several yards past the edge of a financial abyss, and offered Republicans a promise: if they took one step forward, he’d take one step forward too. S&P’s downgrade provided an ex-post reminder, but Republicans standing at the edge of the cliff shouldn’t have needed telling that gravity exists.
It’s difficult to say that Republicans only needed to stick to their principles to get a better deal, because on the question of whether to reduce the deficit through tax increases or spending cuts, there is plenty of room for healthy compromise, and Republicans were right to be flexible on that front. When Boehner agreed to a debt reduction plan with $800 billion of tax increases, $1 trillion of revenue increases, and $2.2 trillion of spending cuts, that was a reasonable compromise of the sort that should be encouraged.
But clearly, Republicans needed to be more stubborn than they were. In particular, they needed an ultimatum of this formula: if no deal is struck that cuts the deficit by at least a fixed amount, then Congress will revisit the issue within a short period — in other words, we’re going to keep coming back to this until we get a long-term budget plan that is sustainable. By not drawing such a line, Republicans invited Obama to jerk them around on the details. Take the 800/1/2.2 deal that Boehner agreed to. Shortly after Boehner agreed to it, Obama announced that he needed another $400 billion of tax increases and Senate Democrats began saying they could only think of $1.5 trillion in spending cuts that they could agree to. Somewhere, a used car salesman is cribbing from Obama’s technique.
Republicans are not yet out of the fight. Even though they’ve surrendered the debt ceiling, they still have annual budget plans with which to make their case for a fiscally sustainable government. One has to wonder though — if they achieved so little when they wielded a government shutdown over their opponent’s heads, what should make us think they’ll do any better when gridlock just means spending as usual?