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.