Roving thoughts and provocations

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Obama’s Lesser Evil

Barack Obama; drawing by John Springs

President Obama’s budget proposal this week shows just how thoroughly austerity economics now dominates the policy debate for both Democrats and Republicans. This emphasis is not new: Obama had already signaled he was giving special priority to cutting the deficit well before the November elections, when he named a bipartisan panel to make recommendations on how to deal with future deficits. It was hardly an objective panel, headed by two deficit hawks, former Clinton White House Chief of Staff Erskine Bowles and retired Wyoming Republican Senator Alan Simpson.

Not so very long ago, some economists feared Obama’s stimulus plan was not doing enough, quickly enough to rescue the economy. With US government spending now surpassing revenues by about 10 percent of GDP, those voices have been muffled. Conditions are now ideal for the growing number of deficit hawks in Congress and well-financed think tanks, mostly long-time small-government proponents like the American Enterprise Institute and the Peterson-Pew Commission on Budget Reform, to control the discussion again. And the financial catastrophes in Ireland and Greece, plus serious doubts about economic stability in other countries, have given conservatives another argument for sounding the alarm. An American general now tells us that the deficit is the nation’s biggest security threat.

Of course, the size of the deficit is a result of many things, among them the recession, waging two major wars simultaneously, and the Bush tax cuts. Indeed, the deficit would have likely been far larger without the $800 billion Obama stimulus of 2009: contrary to popular intuition, additional spending helped the government from going into further debt by spurring on the recovery when conditions were so weak, thereby raising tax revenues. The way to reduce the deficit, in other words, is to place the nation back on a fast growth track. When that point is reached, the government can begin to cut back spending to reduce it further. But Obama has not taken that line. He is not about to stand against the political gale.

The current Obama budget is essentially a political package that focuses on the concerns exaggerated by the deficit hawks while countering the harsher proposals by Republicans for cuts in areas like healthcare and education. The budget proposal makes clear that Obama’s efforts to reduce the budget in coming years will come from cuts in social programs—including some that assist the very poorest Americans—rather than increases in taxes.

Even if that weren’t the case, reducing deficits now while the economic recovery has still not been felt by many people and unemployment ranges from 9 to 10 percent (and significantly higher in some parts of the country and among some minorities ) is simply not good economics. With many Americans still facing personal debt that can hardly pay, the US is not on a secure path to growth. Yet Obama would cut deficit spending in fiscal year 2012. Far better to stimulate further now and let the deficit shrink from its current outsize level on its own as economic growth produces a handsome rise in tax revenues. This is what happened in the 1950s, to pay down World War II debt, and in the late 1990s, to pay down the deficits created during the Reagan years.

Inside the beltway, the Obama plan has been praised. According to the proposal, the level of debt relative to GDP will be stabilized in half a dozen years by cutting the annual budget deficit to 3 percent of GDP. At that level, total federal debt will remain about 75 percent of GDP. Some will argue this is too high, others will correctly realize it is eminently manageable.

There is some unreservedly good news, however. Obama is proposing substantial public investment. He would increase transportation infrastructure by 60 percent in the next six years, promising that four out of five Americans will have access to rail transport by 2035. (Though such plans continue to face stiff opposition from spend-nothing Republicans, as Florida governor Rick Scott showed in his stunt-like decision this week to return billions of dollars of federal financing that would have paid for high-speed rail in his state.) The president would substantially increase investment in energy research. He would hire 100,000 new teachers in the sciences and engineering. He would put more money into early education.

In no case, however, is the money enough. But it is a better start than could have been expected. The Economic Policy Institute has produced a useful summary of how far America is falling behind. Eleven nations have more 25-34 year olds with college degrees than the United States. The lack of decent transportation results in a loss of $80 billion—some say more—in economic activity because of traffic jams. One road out of every three is in poor or mediocre condition. The head of the AFL-CIO notes we spend one third of what Europe does on infrastructure, and Obama’s proposals would begin to close that gap. But to pay for investment spending while cutting the deficit, Obama is sharply cutting back social programs. Painful outright cuts in home heating subsidies will especially hurt the poor. These and other cuts will be part of an extension of the freeze on “non-security” discretionary spending from three to five years. It will bring the level of such spending compared to GDP back to the low levels of the Eisenhower administration.

Why not raise taxes instead? Some tax hikes are proposed, including the expiration of the Bush tax cuts for high earners and limits on deductions—a reversal of the recent agreement to retain them. Other changes include reinstating the limit on itemized deductions. Additional revenue sources for transportation spending are yet to be found, and will require congressional cooperation.

In the end, what this document tells us is that the Obama 2012 presidential campaign has begun. Unfortunately, the political priorities addressed here do not coincide with what is best for the economy. Federal stimulus is running out and the economic recovery could weaken again. Additional stimulus by Congress could have taken pressure off the Federal Reserve, which is now bearing the burden of doing its own stimulus through quantitative easing, involving purchasing up to $600 billion in Treasury bills from large banks. Down the road that could lead to inflation.

And on top of all this, there is a political outcry that Obama is not dealing with the longer-term deficits, which will indeed be large. There is pressure on the White House to reduce Social Security benefits. Yet the large future deficit projections are almost all based on rapid increases in healthcare costs—which will push up Medicare spending— not in Social Security. On these issues, there is little rational conversation in Washington.

If all this sounds familiar, it is. But let’s concede that Obama at least sounds more focused. He has a strategy; he is talking up public investment. He is now doing what he seems to do best. He is campaigning for the 2012 election. A weak economy could undo his best efforts, however. The current proposals would make it weaker. But they are much better than the other party’s draconian cuts. And that’s what Obama is banking on, the lesser bad.

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