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James Kwak Headshot

Whose Fault? What Happened to the Economy and What We Can Do About It

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To believe politicians in Washington and pundits in the media, the national debt has become the most important political issue of the day. (Whether it should be -- as opposed to, say, jobs -- is another question.) The Republican argument is, basically: "Big deficits! Democratic president! His fault!" The Obama administration argument, by contrast, is "No way! George W. Bush's fault!"

I generally side with Obama on this one, mainly because of the two Bush tax cuts and the unfunded Medicare prescription drug benefit. Keith Hennessey, Bush's last director of the National Economic Council, has a counterargument. Some of his points are good. OK, well, one point -- the fourth one down. Hennessey is right that what initially transformed the Clinton surplus into the Bush deficit was the 2001 recession, which was beyond Bush's control, just like what transformed the large Bush deficits of 2007-2008 into the enormous Obama deficits of today was the 2007-2009 recession.

The other points are good debating, but I don't buy them. This could take a while.

1. Obama: Unfunded Medicare prescription drug benefit? Hennessey: Why don't you repeal it instead of complaining about it? You could even use reconciliation.

OK, if Obama were king. Hennessey admits that his administration created a mess and says Obama should clean it up. But cleaning up the mess means either reducing entitlements or increasing taxes, would be incredibly unpopular, and would obviously be filibustered by the Republicans, the new Defenders of Medicare. There's no way Obama could get 51 Democrats with him on this, and if he could, it would mean an end to Democratic majorities in Congress and to Obama's hopes for re-election. I believe there are times when you should take a political hit to do the right thing (because the point of a majority is to govern, not to extend your majority), but asking the Democrats to commit political suicide to repair a Bush-era mistake is a bit rich.

2. Obama: Unfunded wars in Iraq and Afghanistan! Hennessey: Get out, then.

In this case, the Bush administration began a war in Iraq on false (or at least wrong) pretenses and made that country much more dangerous, while neglecting the war in Afghanistan. Obama opposed the Iraq War -- that's a major reason why he's president today instead of Hillary Clinton. But he can't simply say that the last six years never happened and pull out immediately. Colin Powell was right (even if he was wrong about Pottery Barn's policy): "You break it, you own it." And if he did pull out, the Republicans would crucify him politically. National security issues, like entitlements, only go one way politically -- it's much easier to be a hawk than a dove when it comes to fighting wars in the Middle East.

3. Obama: Tax cuts! Hennessey: Let them lapse, then.

See 1 and 2 above. Republicans are already positioning letting tax cuts lapse on the super-rich as "tax increases." It's a lot easier as a politician to give away candy than to take it back. The Republicans have cleverly played the game of enacting policies when in power that are politically difficult to repeal. (Note: The Democrats are trying the same thing with health care reform.) The goal is to force the government to shrink via spending cuts.

Hennessey also says that bracket creep will cause taxes as a percentage of GDP to climb above the long-term average. But it's natural and good for taxes to climb upward as a society becomes wealthier, because the government does more. Entitlements go up as people's conception of what an adequate minimum living standard is. Regulatory costs go up as businesses and products become more complex. Defense costs go up as the amount we are willing to invest in minimizing the risk of death to soldiers goes up. That's a good thing.

Hennessey also says that the long-term problem is Medicare and Social Security. He's right (about Medicare, at least). But then he says that therefore the tax cuts don't matter. This is clever misdirection, since the political issue is why the deficits are so big today -- and they are big today, in large part, because of the Bush tax cuts.

5. (Remember, I agreed with 4.) Obama: I inherited a $1.3 trillion deficit! Hennessey: Yes, but that was due to the recession. And then you passed an expensive stimulus package.

Hennessey's first point is unobjectionable. But insofar as the argument is over why we have big deficits today, it's also irrelevant. The trillion-dollar deficits we have today are the result of pre-Obama policies, just like the initial descent into deficit under Bush was due to pre-Bush policies.

His second point is just silly. In the face of a collapsing economy, the right thing is a stimulus package. The insistence in budgetary balance at the beginning of the 1930s is one of the most cited causes of the Great Depression (along with tight monetary policy and the gold standard).

6. Obama: When I took office, there were already $8 trillion in projected deficits. Hennessey: You changed the rules-it was only $3 trillion. "The President's first budget played games by redefining the baseline to make the starting point look as bad as possible so that Team Obama could claim their policies would reduce the deficit."

Well, we might never agree here, but I would say that Team Obama reversed out the games that the Bush administration (and previous administrations) had been playing all along. According to the New York Times, the "gaming" that Hennessey accuses Obama of is this:

* Ending the Bush practice of keeping Iraq and Afghanistan out of the budget and using supplemental appropriations instead.
* Assuming that AMT will be patched by Congress each year (as it is), rather than pretending that it will be allowed to encompass the middle class.
* Ending the Bush practice of budgeting artificially low Medicare payments and then allowing higher payments during the year.
* Adding a budgetary line for disaster relief; historically the government paid for disaster relief, but never budgeted for it.

Secondly, Hennessey's charge doesn't make logical sense. Changing the rules would only help Obama claim to reduce the deficit in the future if he were planning to change the rules back in the future. Unless Hennessey thinks Obama had a secret plan to stop assuming AMT fixes at some point in the future (or something similar), his argument not only isn't true, it can't possibly be true.

Hennessey's major point is to say that Obama should stop playing the "blame game" (defined, in Washington, as someone else pointing out something you did wrong):

"I suspect that many Americans are tired of the blame game, especially more than one year into a new Administration. Whatever your view of President Bush, his policies, and their results, America needs to look forward. We have big challenges ahead of us, and we need to propose, debate, vote on, and then implement solutions."

I agree that blaming everything on George W. Bush is neither good policy nor good politics. But there are some issues on which it is not only relevant, it is necessary to point out why we are in the mess we are in. One is tax cuts. The Republican attack line is "Tax increases bad. Hurt economy." Now, the empirical evidence for that is weak. But more important, pointing out that you just want to repeal the Bush tax cuts means that we are going back to the marginal tax rates of the Clinton years, when the economy was booming. This is different from raising taxes to a level that the economy has not seen before -- that might be risky. Simply undoing a policy is politically and substantively different from putting in place a new one.

Similarly, when people attack you for increasing government spending, it makes perfect sense to point out that they voted for the unfunded Medicare prescription drug benefit, because it is relevant whether they are deficit hawks or deficit peacocks. Deficit peacocks should simply be ignored, and that is relevant to public debate. Hennessey himself may be a hawk and not a peacock. But this whole "America wants to move forward" line, by obscuring the reasons why we face the problems we face, only makes it more likely that we will end up with the wrong solutions-or, more likely, no solutions at all.

Crossposted with The Baseline Scenario.