Obama’s best strategy: Do nothing

March 8, 2013

Ronald Reagan had a catchphrase when faced with a crisis, especially a synthetic “crisis” of the kind Washington loves to concoct. He would call in the officials and media advisers rushing manically around the West Wing and calmly tell them: “Don’t just do something – stand there.”  In this respect, as in several others, “No Drama Obama” seems to resemble the man he once admiringly described, despite their ideological animosity, as the last great “transformational” U.S. president.

With Wall Street hitting new records as Washington supposedly plunges into its latest fiscal crisis with the budget sequestration that began this week, Obama could do well to emulate Reagan’s laid-back style. In addition to doing nothing about the latest manufactured fiscal crisis, he could explain why nothing is the right thing to do.

To be more specific, Obama could negotiate a truce in the budget war. Instead of insisting that Republicans must “pay” for Democratic spending cuts by agreeing to higher taxes, the president could offer a much more attractive deal to both sides. If Republicans eased the sequester and demanded no new spending cuts, the Democrats could promise not to raise any taxes. Such a ceasefire would  be seen by both parties as an honorable draw. Republicans would have fulfilled their pledge to stop higher taxes; while Democrats would have thwarted efforts to gut government and the welfare state.

There would be only one drawback. My fiscal ceasefire proposal does nothing to reduce deficits or government debts. But doing nothing on deficits is exactly the right policy for the U.S. today. Apart from the political pendulum, which is swinging all over the world against austerity, as described in this column last week, there are four strong economic arguments for U.S.  “deficit denial.”

First, there is absolutely no market pressure on the U.S. government to reduce borrowing. On the contrary, investors are so desperate to lend to the U.S. Treasury that unlimited amounts can be raised in the bond market at the lowest interest rates ever offered. While these low rates are partly due to Federal Reserve monetary policies, private investors, too, have been stampeding into U.S. bonds. Since nobody is forcing American individual savers or foreign sovereign wealth funds to lend money to the U.S. government on the same generous terms as the Fed, these lenders presumably believe that U.S. Treasury bonds are a good investment.

Secondly, government deficits will continue to support what is still a very feeble economic recovery, for the standard Keynesian reasons explained in undergraduate courses of Economics 101. While some economists initially disputed the stimulative effects of fiscal policy after the financial crisis, the evidence of the past four years, as analyzed both respected institutions such as the International Monetary Fund and Organization for Economic Cooperation and Development, has been pretty conclusive: The impact of fiscal policy on growth has turned out to be even stronger than pre-crisis theories and models implied.

Thirdly, the U.S. economy’s modest recovery since 2009 has already gone a long way to solve the deficit “crisis,” if there ever was one. The federal deficit has halved, from 11.1 percent of GDP in 2009, to 5.3 percent this year. It will halve again, to just 2.4 percent by 2015, even without any further fiscal action, according to the Congressional Budget Office. If this week’s spending sequester were completely undone, the CBO deficit projections for 2015 and 2016 would still be around 3 percent of GDP, well within a comfortable range – and that projection assumes very weak economic growth, of just 1.4 percent this year and 2.6 percent in 2014. If growth now accelerates, as seems increasingly likely, the deficits will shrink much faster than projected, even without any need for further fiscal effort, either in the form of tax hikes or spending cuts. Thus the claim that U.S. fiscal solvency would require the sequester to be replaced, either by other spending cuts, or by tax hikes, is manifestly false.

Finally, there is the genuine fiscal challenge that the U.S. does face in the very long-run, due to the aging population and the escalating costs of healthcare. But this challenge has nothing to do with tax and spending decisions made today. If healthcare costs continue to grow faster than the economy, they become unsustainable in the long run, whatever the starting level of deficits and debts. Even eliminating today’s deficits completely would only defer Medicare’s inevitable bankruptcy by a few years. To make Medicare financially sustainable in a world of constantly rising healthcare costs, tax rates have to rise without limit. The only alternative is structural reform to stop medical inflation, for example by reducing U.S. drug prices and doctors’ incomes to the much lower levels in other advanced economies.

A concerted campaign to reduce medical costs is the necessary and sufficient condition to secure the U.S. government against national bankruptcy and avoid unfair burdens on the next generation. But such a campaign has nothing to do with today’s battles in Washington about sequestration, tax loopholes and Treasury debt limits.

Unfortunately, political reality makes a serious attack on medical costs very unlikely before the end of the decade, when the demographic pressures on Medicare will become intolerable. In any case decisions made today will not bind future U.S. governments and it is arguably more democratic to leave for voters in 2020 the big decisions on how to balance higher taxes against less comprehensive medical coverage or lower incomes for pharmaceutical companies and doctors.

Meantime, battles in Washington over taxes and non-entitlement spending will only distract attention from the real long-term issue of medical costs, while over-zealous efforts to cut deficits will slow economic recovery, making these costs even harder to bear. Until U.S. politicians are ready to tackle the genuine medical cost crisis, the best thing they can do about the phony deficit crisis is nothing at all.


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I am okay with the basic premise that the President needs to stand down–as his “efforts” have only served to prolong the recovery.

However, I do question the statement that the deficit “crisis” is past. When one considers that total federal tax revenues are forecast at a record $2.7 trillion, and the national debt is $17 trillion; should interest rates increase to the historic norm of 5%, the annual interest burden will be $850 billion. That’s 30% of revenues–and we haven’t even funded government yet. When one considers that we’ve been spending at a rate of $3.5 trillion each year, the debt service will continue to consume a ever-increasing portion of the federal budget. When one adds this too the increasing burden of entitlements, this is unsustainable. Debt and entitlements will consume 100% of tax revenue shortly.

The younger people who voted for Obama who think they will be beneficiaries of government largess better bone-up on the math. There is not any way this can be sustained without the younger people paying significantly higher taxes, and benefits being cut. And that does not include the $850 billion they personally owe on student loans.

Should the anticipated inflation hit (remembering the double-digit Carter years) this whole thing will fall off the precipice Congress and the President have provided. This is insane.

Posted by COindependent | Report as abusive

Don’t worry COindependent, the pharmaceutical industry will just up the dosage in “Natural Flavoring” and everything will be just fine. You’ll see.

Posted by tmc | Report as abusive

I think you are missing the point. If you believe Kaletsky knows what he is talking about (and you should, just read his bio) then the federal defecit was halved in the last four years, and it is going to be halved again in the next four. That is substantive progress, but even that is not really the point. The point is that there never was a crisis. Partisan politics and the news cycle have created a monster from nothing, for no other purpose than to serve their own respective interests, while the real problems we face (fiscal and otherwise) continue both unabated and woefully neglected. Do you think the Fed is going to raise interest rates in such a way as to precipitate the immanent collapse of the American economy? Because that is insane. Maybe you should lay off the FOX for a while…

Posted by UnderRated | Report as abusive

“Falsity implies anything”
One of the most basic thing in logic.

The ‘debt’ people often go hand in hand with the ‘grow’ people. Debt, entitlements are nothing to worry about if they factor in a growing population.

Say the debt increase by 5% a year, but the population also increases. So the per capita is not getting worse. The denominator increases so the number if not getting worse. Yes growth of population is the solution to all problems in the eye of today’s mainstream economists.

Sometimes, I wish we would force all economists and government officials to pass basic exams in physics and biology to realize the disaster they are making.

Posted by trevorh | Report as abusive

When it comes to birth rate. It is the depth of the tree, not the fan-out factor!!!

It makes me so angry that people still want to promote the big fan-out factor and an uncivilized fertility rate as solution to the world’s problem!!!

Posted by trevorh | Report as abusive

Sooo uncivilized

Posted by trevorh | Report as abusive

oops, getting too angry and comment inappropriately again

Posted by trevorh | Report as abusive