Does Obama want to cut the deficit?

July 7, 2011

Let’s keep in mind that if President Obama had his druthers, the debt ceiling would’ve already been raised some $2 trillion via a “clean vote” in Congress. No spending cuts. Yes, I know  Obama said the following this earlier this week:

I believe that right now we’ve got a unique opportunity to do something big — to tackle our deficit in a way that forces our government to live within its means, that puts our economy on a stronger footing for the future, and still allows us to invest in that future.

But that’s Obama trying to make it sound like it was his goal all along to link a debt-limit bill with deficit reduction. Of course, it was Republicans who forced him to accept such a linkage. This was Team Obama in April (via The Hill):

White House press secretary Jay Carney said it is “imperative” that a debt-limit vote not be “held hostage to any other action, because of the consequences of not raising the debt ceiling.” Jack Lew, the director of the Office of Management and Budget, struck a similar tone in an interview airing this weekend. “Our very strong view is that the debt limit should be passed as a clean, standalone bill,” he said in an interview with Bloomberg TV’s “Political Capital With Al Hunt.”

Also keep in mind that since the November elections, Obama has a) blown off his own debt reduction commission, b) offered an official budget that added $10 trillion in new debt over 10 years, c) had to be nudged, according to reports, by Treasury Secretary Geithner into giving a debt speech, which turned out to be smoke and mirrors and can’t even be scored by the Congressional Budget Office.

The evidence strongly points to Obama not really caring much about debt reduction right now. It also points to him believing – as do many left-of-center economists – that the debt issue is a long-term problem and that any near-term austerity is big risk with such a weak economy. Macroeconomic Advisers, a economic consulting firm respected by the White House, just put out this analysis of the the debt reduction plan put forward by Obama’s commission (bold is mine):

Assuming current fiscal policies remain in force, our economic model suggests that interest rates will rise considerably over the next decade, with the yield on the 10-year Treasury note reaching nearly 9% by 2021. We estimated the effects of a fiscal contraction that is patterned after the so-called Bowles-Simpson plan and that averts this dire scenario. The plan would pare more than $4 trillion from the federal debt by 2021 relative to current policy. Roughly two thirds of this contraction is from spending cuts, the rest from tax increases. For a given path of long-dated yields, the macroeconomic effects of the fiscal contraction are sizable. “Fiscal drag” would reduce real GDP growth by 0.4 to 0.5 percentage point per year through 2015, leaving the unemployment rate a percentage point higher by then.

This is key: Keynesian models like this assume all spending cuts and taxes increases slow growth by reducing overall demand. (Former Obama economist Christina Romer, however, thinks tax increases are less harmful.) The White House has the same kind of models. Slower growth hurts incomes and jobs, which, in turn, hurts the standing of the guy in the Oval Office.

There is a high likelihood that Obama believes spending cuts and tax increases in 2011 and 2012 would hurt his re-election.  This is why he would prefer a clean debt ceiling bill – or, since that is not possible, a debt reduction bill that’s as small as possible. (Or, even better, one with a bit more stimulus in it, like a payroll tax cut extension.) Every dollar in spending cuts or tax hikes makes him just a bit more likely to lose in 2012. From his perspective, better to push off austerity to 2013 — 0r beyond.




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Very cynical article. James – you obviously understand basics of economic theory. Why not write a better article by providing sufficient context (wouldn’t have taken many more words) instead of being selective in order to better make your point?

And “left-of-center economists” – nice touch, however in reality, 10% of economist are trickle-downists and the remaining 90% generally agree with each other. The left-of-center economist is something that you just made up. Who knows – maybe third time is the charm with trickle-down. It has failed miserably twice before, but who knows.

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[…] want to cut the deficit Jul.07, 2011 in Rss Austerity is not compatible with re-election. James Pethokoukis Tags: deficit, doesn’t, Obama, […]

Posted by Why Obama doesn’t want to cut the deficit | Report as abusive

ahtohg2: Why not write a better comment by providing sufficient context? 90% of economists generally agree with each other? Where did you pull that number from? Trickle down economics failed? How? Context, sir.

James: excellent op/ed. Cynicism of this administration (and, unfortunately, most politicians) is in order. You offer a reasonable explanation for what I thought was just inexplicable stupidity: it’s all political posturing.

Posted by FarmerBen | Report as abusive