The Dispiriting Debt Limit Resolution

Following the twists and turns of the debt limit negotiations has been dispiriting. If I had wanted to have a more pleasant weekend, I should have gone somewhere without access to newspapers and electronic devices, including old-fashion ones such as a radio, with which to keep informed. After all, while exactly how the story would unfold was unclear, it was not going to end with the Treasury defaulting on its debt. Somehow we would be spared that, if we did not know exactly how.

Most media outlets, focused as they were on a perhaps fictitious Tuesday midnight deadline (with some websites showing the days, hours, and midnight to "default," even though debt default could not occur on Wednesday, since no interest payments are due on that day), have portrayed today's Senate vote as just in time and suggested that the compromise had to be a good one, since both the Democrats' most liberal and the Republicans' most conservative members hated it and pretty much everyone disliked it. For the most part, the media have been playing along with the Administration and others, who are trying to convince the American people that they are the winners in this deal.

But, of course, that is not the case. The American people are not well-served by this agreement. While the budget cuts will not be that large in the next year, the cuts in current spending will serve as a fiscal drag on the economy, slowing its already anemic growth rate. As for cuts coming later, the risk is that the economy could still be in a slump, and cutting spending more is precisely the wrong policy for the government to undertake when unemployment is high.

While many like to criticize John Maynard Keynes, his insight that an economy can for a long time be at an equilibrium point at less than full employment remains proven by historical experience. When monetary policy has ceased to be very effective in stimulating the real economy, as is now the case, fiscal policy is the only way to increase the growth rate to a point where the unemployment rate comes down. President Obama is wrong when he says that the U.S. government must tighten its belt when families are forced to. Precisely the opposite is the correct policy.

It is not entirely clear whether the Administration is making a virtue out of what it believes is political necessity, or whether, now that economists such as Larry Summers and Christina Romer have left the Administration, members of the Administration no longer believe that much fiscal stimulus is necessary. But there is reason, unfortunately, to think they may actually believe some of their current rhetoric. For example, Treasury Secretary Geithner, according to a June Washington Post article, is much more enamored of long-term deficit reduction, including entitlement reform, than he is of stimulus spending. He is quoted as comparing stimulus spending to sugar in one meeting. The article describes Romer's reaction: "Wrong, Romer snapped back. Stimulus is an 'antibiotic' for a sick economy, she told Geithner. 'It's not giving a child a lollipop.'"

What is disheartening about the current policy choices is that we cannot get the long-term fiscal problem resolved without getting adequate growth in the economy and tackling the problem of escalating medical costs generally, not just Medicare spending. But I am sure in the coming days we will see a parade of Senators and others, all smiling and statesmanlike, claiming on venues such as the Charlie Rose Show that the compromise just reached was good for the American people, how when the chips are down politicians will surmount narrow political interests and do what is right for the country, and how the compromise, imperfect as it is, proves what a good job they did in averting default and making progress in solving our fiscal problems.

What most of those who supported this agreement will not admit is that government policies that are likely to worsen an economic slump and prolong a period of high unemployment are bad in both a policy and political sense. As to the politics, this is not predictable, but economic distress tends to push some people to the extremes. Increasing the polarization of American politics is something that most politicians should not want.

As for the presidential election, the debt limit saga has not been good for Obama. Many Democrats and Republicans believe he showed himself to be a poor negotiator, which is not what one wants in a President. Obama has also alienated his liberal base, and some are likely wondering if they made a mistake in choosing him over Hillary Clinton. The Administration clearly thinks that its triangulation politics will appeal to independents and that liberals have nowhere to go. But unless the Administration changes its ways, there will be lessened enthusiasm, and this will matter especially among young voters, to whom Obama appealed in the last election, because these voters have not established a practice of voting that many somewhat older people have. On the other hand, the Republican field is devoid of anyone with a modicum amount of charisma and potential for broad appeal, and some of the major candidates, while appealing to Republican caucus and primary voters, clearly cannot attract much independent support. For an election that many are billing as an exceptionally important choice between two visions of the proper role of government, the choice voters face may be at best uninspiring.