Obama's Weakness on Debt-Ceiling Deal Should Not Be A Surprise

Paul Krugman

Barack Obama signaled that he was going to be a weak president on January 11, 2009. That is when Obama, nine days before his inauguration, told ABC News' George Stephanopoulos that he was going to take a "look forward, not backwards" approach on the apparent crimes of the George W. Bush administration.

Obama, unfortunately, followed through on that pledge, and it helped Republicans claim the U.S. House of Representatives in November 2010. The House takeover, in turn, led to last night's debt-ceiling deal, which a leading columnist calls a "disaster"--and a "political catastrophe" for Democrats. The deal probably will make the nation's economy worse, not better, and it provides more evidence that Obama is headed for a failed presidency.

How bad is the debt-ceiling deal, from both an economic and political perspective? Allow Paul Krugman, New York Times columnist and Nobel Prize-winning economist from Princeton University, to explain:

A deal to raise the federal debt ceiling is in the works. If it goes through, many commentators will declare that disaster was avoided. But they will be wrong.

For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.

Is Krugman going over the top? Could the U.S. really become a banana republic? We think the answers are no and yes. And it's because the White House, the Congress, and the public seem to be clueless about fundamentals of macroeconomics. Writes Krugman:

Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.

These concepts are not all that difficult to understand. But Americans apparently would rather listen to the simplistic "solutions" served up by Tea Party Republicans. Why is this dangerous? Rana Foroohar explains in a Time magazine essay titled "Balanced-Budget Blues: If families have to balance budgets, government should too, right? Wrong." Writes Foroohar:

Folksy politics is always difficult to counter successfully, in part because it has such strong emotional appeal. Consider the hoopla over raising the U.S. federal debt ceiling and the Republican efforts to pass a balanced-budget amendment to force the U.S. to make whatever spending cuts are required to get into the black and stay there, year after year.

The conservatives pushing this "cut, cap and balance" plan have a very powerful and easy-to-digest sales pitch: since no individual household can continually spend more than its income, why should the federal government be able to? It's a compelling question, especially if you look at the federal government's budget the same way you would look at your family's.

Folksiness, however, can lead the public down a dangerous path. Writes Foroohar:

But the macroeconomy doesn't work like the microeconomy, and there's a good reason why. It's called the paradox of thrift, which was first elucidated by British economist John Maynard Keynes. The idea is simple: while you and I as individuals can improve our financial position by saving, society as a whole often cannot — especially during times of recession and sluggish economic growth, like now. That's because when we all decide to start saving, nobody shows up at the shops to spend. Consumption, which accounts for about 60% of all economic activity in the U.S., goes down, and consequently so do incomes and employment. It's news to no one that this is exactly what has been happening. Amazingly, after two years of economic "recovery," unemployment isn't falling but rising.

In Keynesian theory, this is exactly the time that government has to step into the fray and spend, even if it has to borrow to do so.

Obama and Congressional Democrats have utterly failed to explain this to the American people. As a result, we can rest assured that the economy will be sputtering in November 2012--and beyond.

Can you say "President Bachmann"?

It could happen. Obama continues to follow a path of weakness that he established before he even took office. Let's return to that fateful day in January 2009:

Why has the "look forward, not backwards" philosophy been so damaging? Let's look back at the exchange between Stephanopoulos and President-Elect Obama on January 11, 2009:

Q: The most popular question on your own website is related to this. On change.gov it comes from Bob Fertik of New York City and he asks, ‘Will you appoint a special prosecutor, ideally Patrick Fitzgerald, to independently investigate the greatest crimes of the Bush administration, including torture and warrantless wiretapping.’

OBAMA: We’re still evaluating how we’re going to approach the whole issue of interrogations, detentions, and so forth. And obviously we’re going to be looking at past practices and I don’t believe that anybody is above the law. On the other hand, I also have a belief that we need to look forward as opposed to looking backwards. . . . My orientation is going to be moving forward.

Obama has vowed not to look backwards. The debt-ceiling deal shows he is not very good at looking forward, either.