A New Economic Direction For President Obama

by Sheri Rivlin and Allan Rivlin on August 9, 2011

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Some people are saying President Barack Obama will need a new economic message heading into the 2012 presidential election, but this is ridiculous!  Obama needs a new economic direction right now, because America needs strong economic leadership today as much as at any time during Obama’s presidency. 

The President was elected to do just one thing, change the economy.  So far he has failed to do so.  The American economy is still stuck in that ditch he was talking about last year, and is again threatening to slip backward into the ravine.   All the cycles are vicious not virtuous.  The “job-creators” are not doing their jobs, and the job doers have too few jobs to do.  People have too little money to spend, so they are not spending, so employers are holding back on hiring.  Fixing the economy means getting the cycles turning in the other direction, where consumers have the confidence to spend because/so employers have the confidence to expand.

Even beyond the credit rating downgrade and the dramatic drop in stock prices, headlines from Europe and Asia all highlight global weakness, new threats and constraints.  Very little is going right in the global economy right now, and there are as many suggestions that things could get worse as there are expectations that things will just continue to grind along at this frustrating pace longer than anyone has the patience to accept.  What is needed is a realistic path toward what Americans believe is their right: economic growth and prosperity. 

Democrats need a vision of Prosperity.  President Obama needs to lead America back.  This will require a vision of how to get back to prosperity and the leadership to take us there despite the political opposition.  The good news is, if the direction is clear, the balance of power has shifted in the struggle with the opposition.  If Obama knows where he wants to lead on the economy, he has the leverage to pass the policy.

What is needed is a clear articulation of what Obama believes and all Democrats can defend.  Both of necessity and providence it must balance the economy’s need for job creation in the short term with realistic plans to control the long term deficit.  But it cannot be a compromise that fails to do either well.  There has to be enough job creating activity to get the economy moving forward in the next 12 to 18 months – even if there is also enough serious deficit reduction to keep America on a sustainable path over the next 20 to 50 years.  Democrats should not limit themselves – and Republicans will not have as much leverage to limit Democrats – if Democrats have a vision that leads us back to true prosperity.

The new direction is forward.  After two economic policy showdowns already in 2011, the next deadline is once again upon us.  The government runs out of money when the fiscal year ends at midnight on September 30, unless Democrats and Republicans can agree on the Appropriations Bills, or far more likely, a continuing resolution to keep the government funded at current levels as modified by the earlier deals.  House Republicans are expected to call for even deeper cuts setting up yet another budget conflict.

But the next budget battle will be nothing like the recent debt ceiling battle which Republicans understood to be their “leverage moment” because they knew Democrats had zero tolerance for default.  This meant Democrats had zero bargaining leverage, so they frustratingly made concession after concession.  In a negotiation, the side that makes the first concession ususlly makes all of the concessions – that is the side with no leverage.  It was the Democrats last spring but it will be the Republicans in the fall.  Their “leverage moment” has come and gone and the debt limit has been raised until 2013.  This fall Democrats enter the negotiations with the advantage. 

Democrats will have all the leverage this fall.  A government shutdown in October would be intolerable for Republicans.  A third showdown in 2011 that actually lead to a shutdown of the federal government would convince voters that electing Republicans into divided government  caused nothing but conflict when what America needs is for its leaders to come together with no higher priority than getting our economic problems solved. 

Government shutdowns are always losing territory for Republicans, because even if many Americans complain about government in general, Americans like a lot of specific things government does.  Many voters may view Washington as a sea of acronyms, but take away the FAA for a single day and people notice.    The same would be true of USDA and FDA food inspectors, and the Veteran’s Administration, and on and on. 

And the environment this September is going to be fairly hostile to budget cutters as every local news organization will be loaded with back-to-school stories featuring bright, energetic, laid off teachers and the overcrowded classrooms of the teacher that remain on the job.  Some people may remember that Tea Party candidates were elected last fall, but America’s parents may not remember endorsing education reform in the form of fewer good teachers and larger class sizes.  A protracted government shut down in this environment will cause antipathy to Tea Party America to boil over no matter who scored tactical points in the blame game run up.

Simply put, Democrats and political commentators are placing a lot of emphasis on the Tea Party Republicans, but this is so last week.  The House Republicans will never be able to match their level of influence in the next rounds of negotiations.  Realizing this, Obama must join House Minority Leader Nancy Pelosi in knowing the Democrats have to fight for job creation in the next budget battle and be willing stand firm for their approaches and values.  Obama needs to put forward an aggressive but balanced plan for short-term, medium-term, and long-term economic policy now because there is a very good chance that after some posturing, some brinksmanship, and even a week or two of standoff in the form of a government shutdown, the Republicans will end up accepting something quite close to the next plan Obama puts on the table.  

A bold but balanced economic vision.  But this will only be successful and worth doing if Obama and the Democrats know what policies they need to push, and this requires a new commitment to a core economic philosophy that must start in the White House.   Democrats have lost their identity when it comes to economic philosophy, with doubts and divisions about how to balance the need for job creation with concerns about long term debt.  Congress waited all winter, and then all spring, and now all summer for the White House to take the lead on a job creation agenda – and it seems the White House was waiting for Congress to lead.  Right now, only Obama can lead the party back to confidence.

In keeping with past rhetoric and current realities, the new vision will have to feature a balancing of concerns for short term job creation and long term fiscal health.  These are not contradictory goals, and indeed, they are mutually reinforcing.  Success at long term debt reduction should allow greater credibility in short term spending, just as successful short term stimulus can get the economy moving forward reducing long term deficits.  The Simpson-Bowles and Domenici-Rivlin (yes, we are related) Commissions, and the work of the bi-partisan “Gang of Six” Senators have proven such a balance is attainable.  It was only the distorted leverage of the House Republicans in the debt ceiling negotiations, now passed into history, that made the economically feasible seem politically infeasible.  

America needs a jobs agenda.  President Obama would need a bold jobs agenda, even if he had no chance of passing one.  At least then the public would know what they are missing due to the opposition’s out-of-balance focus on long term debt.  But politics aside, the American economy (and the global economy too) needs bold action now to avoid decades of slow growth that would bring no relief to the debt crisis or anything else.  The most recent economic indicators highlight global weakness and the potential for a deficit expanding further set-back to the U.S. economy and even greater weakness in the economies that have gone even further down the wrong path of austerity. 

This, paired with the success of two rounds of budget showdowns in identifying trillions of dollars in agreed to cuts in long term discretionary spending, allow a needed shift in emphasis toward job creation.   If job creation is Job A, and long term debt reduction is Job B, then there may have been too little emphasis on Job B in 2009 and 2010 creating an opportunity for Republicans, but there has been too little emphasis on Job A in 2011.  Right now, America needs a jobs plan.

Obama must Redefine Modern Keynesianism:  If only Democrats could turn to advisors who had faced down both economic and political challenges like the ones we are now facing.  The good news is we can, the bad news is they are all dead.  More than a few economic analysts, most notably Paul Krugman in the New York Times, have noted similarities between these times and the Great Depression years of the 1930’s. 

President FDR’s adoption of the ideas of the English economist, John Maynard Keynes, was slow and halting and took several years.  Even though FDR started off with many high profile government spending initiatives; most famously the CCC and the WPA, he faced intense pressure to cut spending due to the size of the deficits he incurred, and in 1936-37 the US budget was more restrained and the economy started slipping backward again.  Although they met and exchanged correspondence through this period, it was not until 1939 that FDR fully embraced Keynes’s ideas.  America started running larger deficits and the economy started gaining steam again.  And then, after Pearl Harbor, America entered World War II and no one cared about the record deficits that put America on a path to a period of unprecedented prosperity.   

A new modern Keynesianism for 2011:  Obama, and all Democrats, must re-commit to Keynesian economics now, but it must be a modern Keynesianism for today’s global economy.  If Obama is to chart a new direction it has to include strong measures to create jobs and put money in consumers’ hands.  This will necessarily include some familiar policy proposals that will draw Republican criticism.  Extensions of unemployment benefits should be automatic.  The payroll tax holiday should be extended.  Cash strapped states need more federal aid to keep teachers, police, and fire fighters on the job.  Needed highway construction and other changes to infrastructure should be done now while borrowing rates and constructions costs are low due to excess supply.  These policies worked in 1939, after Republican economic policies failed in 1929, and helped stave off a great depression in 2009 after Republican economics failed again in 2008.   Democrats have earned the right to believe their economics works even if experience tells us sometime it works only painfully slowly when the hole is a deep one.

Many people point to warnings from capital markets, China, and the Republicans and worry that new spending has been ruled out in the near term by the prior rounds of negotiations.  This is only partially true.  Budgets are complicated and allow a lot of maneuvering room when they are approached creatively.  If Republicans are knocked off of their obstructionist stance and are forced to come to the table to solve problems, there is a lot of medium to low hanging fruit for creative solutions.   Tax reform that closes loopholes and other “tax expenditures” to generate additional revenue (which Democrats like) while lowering marginal rates (which Republicans like) could stand on its own or as part of a grand bargain that still may be achievable through the new “super committee” created in the debt ceiling deal or far more likely after it fails.

Democrats need to be bold and creative in making the case for billions of dollars in short term economic job creation.  And Democrats must be just as bold in addressing the long term debt in order to have credibility and capital to address our needs today and in the future.  We must continue to be willing to make reasonable changes in government programs to keep our promises in line with our resources over the long term.  The two goals are mutually reinforcing as President Obama said as recently as Monday, “The good news here is that by coming together to deal with the long-term debt challenge, we would have more room to implement key proposals that can get the economy to grow faster.”

The key to success for Democrats is to learn the correct lesson from the Republicans’ debt limit negotiating strategy, and stick together.  Many wrongly conclude that firm demands and clear line-in-the-sand ultimatums helped Republicans in the debt ceiling battle, but Democrats had plenty of those, we just did not have the leverage or unity to hold them.  What we need to succeed is common goals and mutual respect.  Democrats who worry about jobs and Democrats who worry about long term debt have both been right all along, and they each need to acknowledge the legitimacy of the others’ points of view.  Excessive line in the sand political posturing designed to preserve campaign issues in 2012 are ill-timed and ill-advised.  Far more than campaign issues in 2012 so we can govern in 2013, Democrats need leadership and cooperation now so we can show America and the world that we can solve the problems that confront us today.

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