This fall, Congress will either follow the conventional wisdom and prematurely cut government outlay before an economic recovery arrives, or it will increase public spending, put jobless Americans back to work, and reduce the deficit in a less painful fashion thanks to increasing economic tailwinds. The road that Congress takes depends on presidential leadership.
Until very recently, deficit hawks were hogging every available megaphone, claiming that deficits and debts were more ominous than protracted joblessness and recession. But you know that this foolish consensus is beginning to crack when political moderates such as columnist Matt Miller, budget guru Robert Greenstein, and Yale economist Robert Shiller take a different view.
Greenstein, who heads the influential Center on Budget and Policy Priorities (CBPP), bows to nobody in his longstanding concern about unsustainably large deficits. CBPP's latest paper, by Greenstein's close colleague Paul Van de Water, takes issue with the premise articulated by Erskine Bowles, chair of Obama's own commission on budget reform, that the federal budget should be balanced at about 21 percent of GDP, roughly the postwar average.
But as Van de Water points out in his paper, released July 28:
Such recommendations, however, fail to take account of fundamental changes in society and government -- the aging of the population, substantial increases in health care costs, and new federal responsibilities in areas such as homeland security, education, and prescription drug coverage for seniors. These factors make the expenditure levels of several decades ago inapplicable today. A careful analysis of these factors indicates that it will not be possible to maintain federal expenditures at their average level for decades back to 1970 without making draconian cuts in Social Security, Medicare, and an array of other vital federal activities.
Matt Miller, a longtime budgetary moderate, made a similar argument in Wednesday's Washington Post, noting that spending was well above 21% of GDP under Reagan.
Reagan ran government at this size at a time when 76 million baby boomers weren't about to hit their rocking chairs. In 1988, 32 million retirees received Social Security and 33 million were on Medicare, our two biggest domestic programs. By 2020, about 48 million elderly Americans will receive Social Security, and 62 million Americans will be on Medicare (then the numbers really soar).... Health costs in the Reagan era were around 10 percent of GDP, while they're now 17 percent, headed toward 20. Obviously we need a national crusade to make health-care delivery more efficient. But until there's progress on this front, the 21 percent goal would be tantamount to Democrats agreeing that Uncle Sam should handle health care, pensions, defense and little else.
Obviously, government needs to spend more money, both to get the economy out of the deep jobs recession, and then to meet other commitments valued by citizens. The only way to accomplish these goals is not to get hung up on deficits in the short run -- to spend what it takes to put Americans back to work and then raise taxes on the wealthy so that we can have a more balanced fiscal picture -- but that could be social outlay of 25 percent or even 30 percent of GDP.
Another mainstream economist, Yale's Robert Shiller, author of the book that warned of the financial collapse, Irrational Exuberance, recently wrote in the New York Times that government needed to spend more money putting people back to work directly -- breaking an Obama administration taboo. Obama economic policy chief Larry Summers opposes Roosevelt-style direct jobs programs, and stimulus spending has been carefully directed to the states and the private sector. But Shiller wrote:
Why not use government policy to directly create jobs -- labor-intensive service jobs in fields like education, public health and safety, urban infrastructure maintenance, youth programs, elder care, conservation, arts and letters, and scientific research?
Would this be an effective use of resources? From the standpoint of economic theory, government expenditures in such areas often provide benefits that are not being produced by the market economy. Take New York subway stations, for example. Cleaning and painting them in a period of severe austerity can easily be neglected. Yet the long-term benefit to businesses from an appealing mass transit system is enormous.
Meanwhile, senior Republican economists as orthodox as former Fed Chairman Alan Greenspan and former Reagan budget director David Stockman are excoriating the Republican Party and leaders like Senator Mitch McConnell for wanting to extend the Bush tax cuts at a time when a long-term path to fiscal discipline needs to be a combined recovery program.
So here is the state of play:
Republicans are setting themselves up as the wildly irresponsible party by arguing that we can have both tax cutting and effective fiscal and economic policies, too. Sensible moderates are breaking with the orthodox view that we need smaller government.
This is another of those teachable moments.
But where is the high-profile Obama speech making clear that the top priority for now is putting America back to work, that deficit reduction will come when the economy is back on track -- and that the budget will not be balanced on the backs of those who depend on Social Security, Medicare, and other key social outlays?
The misguided Erskine Bowles, with his austerity program, did not drop into the budget debate from Mars. He was appointed by Barack Obama.
The New York Times reported Sunday that Obama has been meeting with vulnerable Democratic members of Congress, offering to do anything to help them -- including staying out of their districts. The front-page piece, by political reporter Jeff Zeleny, was headlined, "To Help Democrats in the Fall, Obama May Stay Away."
Uh, why does this not sound like a winning political strategy? Maybe if Obama got serious about putting Americans back to work and explaining the real connection between an economic recovery and deficit politics, incumbent Democrats -- and voters -- might welcome the president into their districts.
Robert Kuttner's new book is A Presidency in Peril.
He is co-editor of The American Prospect and a senior fellow at Demos.