Negotiations between President Obama and Republicans on deficit reduction confuse a lot of people because media reports give only partial accounts. Just as current stock market record highs are stated without noting the effects of inflation (nominal vs. inflation-adjusted statistics), reports of gridlock failure to make progress on deficit reduction normally omit the startling progress that is already achieved.
Here's what's really going on, the back story of facts surrounding stage front Congressional theatrics:
1. President Obama and the Republican congressional leadership have been criticized for sailing rudderless and without a compass into allowing the sequester to materialize. But what if the eerie calmness in the face of the storm were not fecklessness but a political strategy?
It's implausible to believe the two sides were thick in the head concerning the sequester's practical consequences (20% across the board budget cuts to discretionary spending) and their political impact on stalled talks on how to reduce the deficit. In fact, there appears to have been a tacit agreement on how to proceed.
2. Allowing the sequester to happen turns out to be, not a mindless stagger, not the worst way to make policy, but, given the politics, a shrewd move for both sides. How can this be?
First, a new death-dance of last-minute crisis negotiations, a la the fiscal cliff, was avoided. And avoiding a deal was a smart move: neither side faced giving in or torpedoing everything. Nobody was pushed to the wall.
The sequester cuts are in fact modest, slightly more than two percent of the global federal budget. The achievement of no deal is that these across the board cuts on defense and other discretionary spending are now baked into the equation, that is, they're the basis of further negotiation.
In other words, a less dramatic contest of wills on adjusting the cuts in specific areas (e.g. in defense spending, trim the outrageous Joint Strike Fighter budget--now over $1 billion per plane--as well as the total number to be built. Or, in entitlements, adjust various payments and rates of increase in Medicare, Medicaid and Social Security).
These sorts of specific reductions can be agreed precisely because the goal of a grand bargain has been tacitly dropped. When a river is too wide for an army to bridge, the smart strategy is to move to narrower spots on the flow and build several bridges.
3. Though not much noticed, the $4 trillion target for deficit reduction over ten years is now, that is, already, achieved, in only the second month of Obama's new term in office. It stands to reason that Obama plans still more deficit reduction over the next three years. It's good for the country and for his legacy. Why should he stop a good run, especially as a supposedly big spender Democrat president turns out to be the most effective deficit-reducer. (Remember that Bill Clinton balanced the federal budget.)
The next move is a fiscal policy agreement, the outline of which is already sketched out: lower tax rates for everyone (Republicans get to crow that Obama conceded to them, after they conceded to increased rates last year) in exchange for closing loopholes (Obama and the Congressional Democrats, and some Republicans, win). Big Oil and other corporate behemoths would pay a price they can well afford.
Presto! Government revenue increases, paradoxically, with lower rates. The media will portray this as a Republican victory. In fact, it would be, once again tacitly, bipartisan agreement. It makes no sense to argue, as the Republicans do for partisan reasons, that Obama and other Democratic leaders don't understand basic fiscal economics.
4. As Paul Krugman showed in the New York Times (March 11), using Congressional Budget Office numbers, the deficit problem over ten years has already been cut down to manageable size. The CBO's headline deficit for this year is projected at $845 billion (down from the stratospheric high of $1.4 trillion in 2009 at the height of the financial crisis). The deficit is falling faster in percentage terms than it has for generations.
Furthermore, the CBO's cyclically adjusted deficit comes in at about $423 billion. This is small enough in relation to total GDP that some new government spending is not unrealistic. Infrastructure modernization (say, public-private partnerships to repair highways, bridges, electric grids) is vital. This would create good jobs in the next few years, re-tooling the broader economy for the medium and long term.
In passing, some other encouraging news:
5. An International Institute for Strategic Studies (IISS) report says U.S. imports of foreign oil have dropped by 40% since 2006, mainly the result of decline of demand in the transport sector (50%) and in industry (40%), combined with rising U.S. production. (The U.S. could become the world's largest energy producer by 2017.) Skyrocketing production of oil, and also natural gas, means that American dependence on foreign oil is declining rapidly.
6. The percentage increase of health care costs has declined for the past four or five years. The reasons are surely complex but the bold fact is not.
7. Given deficit reduction, the ongoing cost of interest payments on U.S. government borrowing to finance the deficits and national debt is declining sharply. The amounts involved are huge.
8. New stock market highs have become a daily occurrence (which of course means it won't last; get ready for a modest drop but don't lose your courage). And the stock market is usually a leading indicator of where the real economy is going. With recent job gains and other signs of a broadly-spread recovery in the real economy (and a stronger dollar internationally), economic growth seems more likely to increase than decrease over the next few years. The stock market is more likely to rise than fall. Calculation of inflation-adjusted as opposed to nominal stock market highs indicate the current bull market may have another 20% to run before it gets to the inflation-adjusted peaks of previous recoveries. 401k's and 403b's are thus more likely to continue to go up over the medium term.
Many Americans have suffered for years and will continue to suffer, especially the long term unemployed and retired people living on interest from bonds in a period of near-zero yields. In the American system as it is, improving their situations will require ingenuity and commitment.
But overall, this is hardly the grave situation predicted by so many commentators, economists and politicos only a few months ago. There's too much rising good news for pessimism to carry the day.
Now comes a season of old wine in new bottles, the return of plain old-fashioned politicking, posturing and eventual horse-trading. Democrats and Republicans skewer each others' budget proposals, talking heads dramatize, newspaper editorials fulminate, and public opinion begins to yawn. There's no crisis anymore.
In other words, we're back to politics as usual, government as "the slow boring of hard boards," as the early 20th century sociologist Max Weber put it in his classic lecture, "Politics as a vocation."
The back story of the new round of deficit negotiations is that the Great Ideological Gridlock in Washington has been broken by stealth.
If this wasn't the tacit agreement between the president and the Republicans going into the sequester, it should have been.