The Long Game In The Budget Battles: Advantage Obama
Late last year, when President Obama overhauled his economic team, some people complained that the departure of Larry Summers and Christina Romer left the White House short of first-rate economists. That may have been true, but what the White House lost in intellectual sparkle it more than made up for in Washington know-how. With Gene Sperling as head of the National Economic Council and Jack Lew as budget director, it boasts two veterans of the Clinton-era budget war—two men who know how to outmaneuver right-wing Republicans.
In the past few months, Sperling and Lew have been playing from the nineteen-nineties playbook. Initially, they produced a budget for 2012 that didn’t do very much at all about long-term deficits, and was instantly proclaimed dead on arrival. Budget hawks cried foul. But the White House was playing a long game, and its budget proposal was merely an opening gambit. Then came Congressman Paul Ryan with his radical “roadmap” to budget balance over the next ten years, which featured slashing reductions in domestic spending, more big tax cuts for the rich, and the conversion of Medicare to a voucher program. I irked some readers by saying that Ryan deserved credit for at least making a specific proposal, but I still believe liberals everywhere should be grateful. By spelling out what the Republicans would do to Medicare and Medicaid, he may well have deprived his party of the White House for the foreseeable future.
If you want to know why Ryan’s “budget-cutting” plan makes no financial sense, the Financial Times’ Martin Wolf spells it out very clearly in his latest column, which is based on an analysis by the non-partisan Congressional Budget Office analysis. If you want to know why Ryan’s plan is political poison, look at Ezra Klein’s blog, where he cites a recent opinion poll showing that a plurality of Republicans—yes Republicans—think the best option for Medicare is to not cut it at all. To say the very least, Ryan presented President Obama with a big opportunity to occupy the center ground. And despite the jibes about him being a covert socialist, this is clearly the ground on which the President feels most comfortable.
And so to today’s budget speech, in which Obama presented his own eminently centrist plan to reduce the deficit without privatizing Medicare, without slashing domestic spending to the point where many government programs won’t be able to operate, and without introducing any big tax increases. I wouldn’t sweat the individual numbers that Obama presented, such as his claim that his proposals would cut the budget deficit by four trillion dollars over twelve years. Forecasting the budget deficit next year is a challenge. Forecasting the deficit three years out is extremely difficult. Ten-year budget projections are largely meaningless.
What is important is the big picture. Where Ryan proposes radical changes to taxes and spending that would alter the social contract between government and governed, President Obama is arguing that we can trim our way to fiscal sustainability. Some cuts here, some tax breaks eliminated there, and, lo and behold, the deficit will be down to two per cent of G.D.P.
To be fair, the President isn’t saying it will be easy. If by 2014 Congress can’t come up with enough cuts to stabilize the debt-to-G.D.P. ratio, he is calling for a “debt failsafe” trigger that would involve spending reductions in all programs except Social Security, Medicaid, and low-income programs. To slow the growth of entitlement spending, he is proposing to beef up the Independent Payment Advisory Board, which the health-care reform act created, and setting it at a target of keeping Medicare growth to the rate of G.D.P. growth plus half a per cent. Even the Pentagon, which has been largely exempted from budget pressures since 9/11, would have to find some (overly modest) cuts. But compared to what Ryan is proposing, these are all relatively minor changes.
Is the plan credible? Without seeing the details, it is hard to say. In the fact-sheet it circulated today, the White House avoided saying which tax loopholes it is in favor of eliminating—the mortgage interest deduction?—and it also failed to provide any projections about, say, the level of federal spending and debt as a percentage of G.D.P. in 2020. That vagueness was certainly deliberate. At this juncture, the White House still doesn’t want to reveal all of its hand. Rather than placating the budget hawks with a definitive and fully worked out set of proposals, the Administration is betting that the bond market will give it more time—time in which the American people can learn more about the specifics of Ryan’s proposals, and get even less enthusiastic about them.
This game still has a long way to run. But if I were a betting man, and occasionally I am, I would wager on Sperling and Lew coming out on top rather than the congressman from Wisconsin.
By: John Cassidy, The New Yorker, April 13, 2011
No More Republican Hostage Strategies: On Debt Ceiling, Just A “Clean Bill”
On Fox News this morning, House Majority Leader Eric Cantor (R-Va.) said he’s prepared to play a dangerous game with the federal debt limit — he’ll help block an extension without “guaranteed steps” on unspecified cuts to public investments.
It is, in other words, another hostage strategy. Last week, the message was, “Give us what we want or we’ll shut down the government.” Going forward, the new message is, “Give us what we want or we’ll wreak havoc on the global economy and trash the full faith and credit of the United States government.
The details of the ransom note apparently haven’t been written yet, but we’re getting clues.
The down-to-the-wire partisan struggle over cuts to this year’s federal budget has intensified concern in Washington, on Wall Street and among economists about the more consequential clash coming over increasing the government’s borrowing limit.
Congressional Republicans are vowing that before they will agree to raise the current $14.25 trillion federal debt ceiling — a step that will become necessary in as little as five weeks — President Obama and Senate Democrats will have to agree to far deeper spending cuts for next year and beyond than those contained in the six-month budget deal agreed to late Friday night that cut $38 billion and averted a government shutdown.
Republicans have also signaled that they will again demand fundamental changes in policy on health care, the environment, abortion rights and more, as the price of their support for raising the debt ceiling.
The stakes of the Republicans’ hostage strategy are significantly higher than the budget fight, at least insofar as the consequences would be more severe. Had the GOP shut down the government, it would have been awful for the economy; if the GOP blocks an extension of the debt ceiling, the results could prove catastrophic. As the NYT noted, “The repercussions in that event would be as much economic as political, rippling from the bond market into the lives of ordinary citizens through higher interest rates and financial uncertainty of the sort that the economy is only now overcoming.” The likelihood of “provoking another credit crisis like that in 2008” is very real.
It’s exactly why Federal Reserve Chairman Ben Bernanke recently warned congressional Republicans not to “play around with” this, adding that lawmakers shouldn’t view the debt ceiling as a “bargaining chip.”
Republicans freely admit they’re doing it anyway. Indeed, they’ve been rather shameless about it.
http://www.washingtonmonthly.com/archives/individual/2011_03/028426.php
It seems to me President Obama’s message should be pretty straightforward: “To prevent a crisis, I expect a clean bill.”
This isn’t complicated. Democrats and Republicans have, routinely, raised the debt limit many times. Neither party has ever held it hostage, or made sweeping demands. Economists, government officials, and even financial industry leaders have all told Republicans to reject the political games and do what’s right.
What’s more, as we discussed yesterday, even Republicans know how this has to turn out. House Speaker John Boehner (R-Ohio) recently said failing to raise the debt limit “would be a financial disaster, not only for us, but for the worldwide economy.” Sen. Lindsey Graham (R-S.C.) said failure to raise the debt limit would lead to “financial collapse and calamity throughout the world.”
Democrats and Republicans can have a larger debate about entitlements and debt reduction in the fight over the next fiscal year budget. But there’s not enough time for that to occur before we hit the debt ceiling.
Just pass a clean bill, prevent a calamity, and get ready for the larger budget fight.
A Minimum Wage Increase Will Not Kill Jobs
As the nation grapples with a jobs crisis and unemployment hovers near 9 percent, it is easy for policy makers to forget the plight of those who work but earn very little. There are about 4.4 million workers earning the minimum wage or less, according to government statistics. This amounts to about 6 percent of workers paid by the hour. They need a raise.
Today, a worker laboring 40 hours a week nonstop throughout the year for the federal minimum wage could barely keep a family of two above the federal poverty line. Though it rose to $7.25 an hour in 2009, up $2.10 since 2006, the minimum wage is still lower than it was 30 years ago, after accounting for inflation. It amounts to about $1.50 an hour less, in today’s money, than it did in 1968, when Martin Luther King Jr. and Robert Kennedy were killed, Richard Nixon was elected president and the economy was less than a third of its present size.
The minimum wage has many opponents among big business and Congressional Republicans. In Nevada, the Las Vegas Chamber of Commerce is pushing to repeal the state’s minimum wage, a whopping $8.25 an hour. Representative Darrell Issa, the California Republican, has proposed a bill in the House that would effectively cut the minimum wage in states where it was higher than the federal threshold by allowing employers to count health benefits toward wages.
Opponents argue that raising the minimum wage would inevitably lead to higher unemployment, prompting companies to cut jobs and decamp to cheaper labor markets. It is particularly bad, the argument goes, to raise it in a weak labor market. Yet with unemployment likely to remain painfully high for years to come, this argument amounts to a promise that the working poor will remain poor for a long time.
What’s more, we know now that the argument is grossly overstated. Over the past 15 years, states and cities around the country have rushed ahead of the federal government to impose higher minimum wages. Economists analyzing the impact of the increases on jobs have concluded that moderate increases have no discernible impact on joblessness. Employers did not rush off to cheaper labor markets in the suburbs or across state lines for a simple reason: that costs money too.
The most recent research, by John Schmitt and David Rosnick at the Center for Economic and Policy Research, found that San Francisco’s minimum wage jump to $8.50 in 2004 — well above the state minimum of $6.75 — improved low-wage workers’ incomes and did not kill jobs. An even bigger jump in Santa Fe, N.M., the same year — from $5.15 to $8.50 — had a similar effect.
Despite evidence to the contrary, businesses and Republicans may keep pushing against the minimum wage — using the jobs crisis now to clinch their argument. They should be disregarded, because their argument is wrong and the United States is too rich to tolerate such an underclass.
By: Editorial, The New York Times, March 25, 2011
How To Kill A Recovery-Republican Style
The economic news has been better lately. New claims for unemployment insurance are down; business and consumer surveys suggest solid growth. We’re still near the bottom of a very deep hole, but at least we’re climbing.
It’s too bad that so many people, mainly on the political right, want to send us sliding right back down again.
Before we get to that, let’s talk about why economic recovery has been so long in coming.
Some economists expected a rapid bounce-back once we were past the acute phase of the financial crisis — what I think of as the oh-God-we’re-all-gonna-die period — which lasted roughly from September 2008 to March 2009. But that was never in the cards. The bubble economy of the Bush years left many Americans with too much debt; once the bubble burst, consumers were forced to cut back, and it was inevitably going to take them time to repair their finances. And business investment was bound to be depressed, too. Why add to capacity when consumer demand is weak and you aren’t using the factories and office buildings you have?
The only way we could have avoided a prolonged slump would have been for government spending to take up the slack. But that didn’t happen: growth in total government spending actually slowed after the recession hit, as an underpowered federal stimulus was swamped by cuts at the state and local level.
So we’ve gone through years of high unemployment and inadequate growth. Despite the pain, however, American families have gradually improved their financial position. And in the past few months there have been signs of an emerging virtuous circle. As families have repaired their finances, they have increased their spending; as consumer demand has started to revive, businesses have become more willing to invest; and all this has led to an expanding economy, which further improves families’ financial situation.
But it’s still a fragile process, especially given the effects of rising oil and food prices. These price rises have little to do with U.S. policy; they’re mainly because of growing demand from China and other emerging markets, on one side, and disruption of supply from political turmoil and terrible weather on the other. But they’re a hit to purchasing power at an especially awkward time. And things will be much worse if the Federal Reserve and other central banks mistakenly respond to higher headline inflation by raising interest rates.
The clear and present danger to recovery, however, comes from politics — specifically, the demand from House Republicans that the government immediately slash spending on infant nutrition, disease control, clean water and more. Quite aside from their negative long-run consequences, these cuts would lead, directly and indirectly, to the elimination of hundreds of thousands of jobs — and this could short-circuit the virtuous circle of rising incomes and improving finances.
Of course, Republicans believe, or at least pretend to believe, that the direct job-destroying effects of their proposals would be more than offset by a rise in business confidence. As I like to put it, they believe that the Confidence Fairy will make everything all right.
But there’s no reason for the rest of us to share that belief. For one thing, it’s hard to see how such an obviously irresponsible plan — since when does starving the I.R.S. for funds help reduce the deficit? — can improve confidence.
Beyond that, we have a lot of evidence from other countries about the prospects for “expansionary austerity” — and that evidence is all negative. Last October, a comprehensive study by the International Monetary Fund concluded that “the idea that fiscal austerity stimulates economic activity in the short term finds little support in the data.”
And do you remember the lavish praise heaped on Britain’s conservative government, which announced harsh austerity measures after it took office last May? How’s that going? Well, business confidence did not, in fact, rise when the plan was announced; it plunged, and has yet to recover. And recent surveys suggest that confidence has fallen even further among both businesses and consumers, indicating, as one report put it, that the private sector is “unprepared to fill the hole left by public sector cuts.”
Which brings us back to the U.S. budget debate.
Over the next few weeks, House Republicans will try to blackmail the Obama administration into accepting their proposed spending cuts, using the threat of a government shutdown. They’ll claim that those cuts would be good for America in both the short term and the long term.
But the truth is exactly the reverse: Republicans have managed to come up with spending cuts that would do double duty, both undermining America’s future and threatening to abort a nascent economic recovery.
By: Paul Krugman, Op-Ed Columnist, The New York Times, March 3, 2011
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