The wrong Grand Bargain
by digby
At this point in George W. Bush’s administration, public-sector employment had grown by 3.7 percent. That would be equal to a bit over 800,000 jobs today. If you add those hypothetical jobs, the unemployment rate falls to 7.3 percent.
Now I realize that the presidency is nothing more than a ceremonial position in terms of domestic policy with no power to do anything but look pretty and passively sign bills that the congress sends to him, but I still think that comparison raises a question: did the Obama administration believe that they would be better rewarded in 2012 for being “responsible” about the deficit than they would be for bringing down unemployment? Or were they truly convinced that the private sector was doing so “fine” that they could do what the president announced in his 2011 State of the Union address and have it all:
Now, the final critical step in winning the future is to make sure we aren’t buried under a mountain of debt.
We are living with a legacy of deficit spending that began almost a decade ago. And in the wake of the financial crisis, some of that was necessary to keep credit flowing, save jobs, and put money in people’s pockets.
But now that the worst of the recession is over, we have to confront the fact that our government spends more than it takes in. That is not sustainable. Every day, families sacrifice to live within their means. They deserve a government that does the same.
So tonight, I am proposing that starting this year, we freeze annual domestic spending for the next five years. (Applause.) Now, this would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was President.
This freeze will require painful cuts. Already, we’ve frozen the salaries of hardworking federal employees for the next two years. I’ve proposed cuts to things I care deeply about, like community action programs. The Secretary of Defense has also agreed to cut tens of billions of dollars in spending that he and his generals believe our military can do without. (Applause.)…
Starting in 2011, we are prepared to freeze government spending for three years. (Applause.) Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will. (Applause.) …
Now, I know that some in my own party will argue that we can’t address the deficit or freeze government spending when so many are still hurting. And I agree — which is why this freeze won’t take effect until next year — (laughter) — when the economy is stronger. That’s how budgeting works. (Laughter and applause.) But understand –- understand if we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery -– all of which would have an even worse effect on our job growth and family incomes.
In fairness, he did also say that the government should do more to “win the future” by investing in innovation, education and infrastructure. And he also said the Bush tax cuts for millionaires should be allowed to expire. But that passage above was the opening ante in the Grand Bargain negotiations that were to come.
I would suppose that looking back they would prefer to have deficit reduction and 7.3% unemployment, but it turns out by embracing the former, they pretty much ensured they wouldn’t have the latter.
It’s not as if there weren’t people saying it at the time. And Mike Konzcal revisited it later in the year:
President Obama announced the freeze and veto threat, and didn’t sound alarm bells, because he believed that the potential risks associated with not signaling to the bond market that deficit reduction was coming outweighed the reality of high unemployment and trying to expand the deficit immediately. 20+ million people not finding full-time work with certainty is bad, but just the possibility of the confidence fairy getting angry is far worse.
This stands in for policy more generally, and it leads directly to all the failures of Grand Bargains and two-deficits cartwheels when it came to plans for dealing with the unemployment crisis. It splits the party between those who have to argue for bond vigilantes and those who have to argue against. The deficit hawkery negates the most powerful market indicator we have for what the government should do – the interest rate. This approach puts boundaries on the range of acceptable ideas on what can be done for the economy – and places getting stimulus out the door through discretionary spending, outside of Congress, out of bounds. And meanwhile current interest rates have never been lower – they are negative in real terms for 10 years out. This was exactly the wrong call to make in early 2010.
Yes it was.
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