Pretty Words, Dismal Economics
Barack Obama’s State of the Union address last week—which called for, among other things, universal pre-K and raising the minimum wage—offered a bold program for rebuilding the middle class. But the president’s continuing commitment to budgetary austerity makes these commitments hollow, if not cynical. And just as Obama and the Democrats paid the price in the 2010 midterm election for excess caution and conciliation, the results of tokenism are not likely to be pretty in the midterms of 2014.
Obama's plans for rebuilding the middle class will cost money. Universal pre-K alone would require upwards of $20 billion a year. Unless the president cynically imagines token “demonstration” programs, job training, clean energy, manufacturing policies, and infrastructure will also require public money.
But all of this spending will be rendered impossible by the demands of the Budget Control Act of 2011, which Obama signed, and by the president’s continuing pledge, reiterated in the State of the Union, not to increase the deficit by even a dime.
The dreaded sequester has gotten most of the publicity lately, just as the impending “fiscal cliff” of mandatory tax hikes and spending cuts got obsessive press focus in December. But the sequester—$110 billion in automatic spending cuts this fiscal year—is only the opening act of a decade of fiscal masochism. The Budget Control Act requires one cliff after another. It ratchets down the deficit by $1.5 trillion over the next decade.
Deficit-reduction as the road to recovery has already been discredited as backwards economics. If we want to get the debt-to-GDP ratio down, the best way to accomplish that goal is to get GDP up. We don’t do that by deflating the economy. GDP actually posted a surprising decline, of one-tenth of one percentage point, in the last quarter of 2012, mainly because the Pentagon has cut its rate of spending in anticipation of the sequester.
Obama keeps trying to have it both ways. His own budget for the fiscal year 2013—even before the Republicans extract more cuts—reduces domestic spending by $24 billion. His own proposed multi-year budget reduces discretionary spending by 2023 to just 2.5 percent of GDP, its lowest share since the early Eisenhower era.
The president declared in the State of the Union adresss that we can’t just cut our way to recovery. But in the portion of the speech pledging more deficit reduction, he proposed to do just that.
Obama’s way of finessing these contradictions is to propose tax reform. Close enough loopholes on the wealthy, and we can have our additional spending and our deficit reduction, too. The problem is that the cuts demanded by the Budget Control Act are so extreme—$150 billion a year for a decade—that no politically conceivable tax reform can being in enough revenue both to pay for the new spending initiatives that Obama proposes and cut the deficit according to that plan.
So it’s time for the president to say once and for all that we can’t deflate our way to recovery—and back up that slogan by disavowing the Budget Control Act and the perverse theory of economics that it reflects. That also means disavowing his own Bowles-Simpson commission.
Events have proven that austerity is perverse economics. New challenges such as Superstorm Sandy demonstrate the urgent need for more public investment. If the president can move beyond his earlier, overly cautious positions on same-sex marriage and gun control, he owes us no less on the economy.
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