Barack Obama: America’s First Tea Party President

By Marshall Auerback

For all his talk of the importance of averting a debt default, Barack Obama.is increasingly signaling that major deficit reduction has become more than just a bargaining chip to bring Republicans aboard on a debt deal. He actually believes that cutting entitlements and reducing the deficit are laudable goals, which would mark “transformational” moments in his President. Let’s face it: the man is not a progressive in any sense of the word; he’s a Tea Party President through and through.

To be sure, it’s tough to make the case that the Tea Party has anything like a genuinely coherent political platform. They hate entitlements, but one of their leading voices in the Senate, Rand Paul, conspicuously avoided any talk of cutting Medicare during his campaign (unsurprising, given how much of his income as an ophthalmologist involved treating Medicare patients). They also have a Presidential candidate, Michelle Bachmann, pledging never to raise the debt ceiling, yet proposing to slash the federal corporate income tax and eliminate the capital gains and estate taxes.

But for the most part, a common thread amongst the Tea Party is a visceral dislike of “excessive” government spending. Virtually all buy into the notion that the federal debt levels are “unsustainable” and that entitlements, really need to be “reformed” (i.e. cut back). In that regard, their aspirations appear to be more in line with the President, than their ostensible GOP allies, one of whom is, Senator Mitch McConnell. The Senate Minority Leader has proposed giving President Obama the power to raise the debt limit on his own through the end of his first term, but to force Democrats to take a series of votes on the debt limit in the months leading up to the election. This would stave off the threat of defaulting on national obligations, but would make the President politically responsible for all subsequent spending cuts and/or tax increases.

On the surface, this would seem to be a great deal for President Obama. He could in theory simply take up Senator McConnell’s offer, raise the debt ceiling and avoid the self-inflicted insanity of draining $4 trillion of aggregate demand from an economy still reeling from massive underemployment and wasted resources. Or the President could, as we and others have suggested in the past, simply invoke the 14th amendment and refuse to enforce a statute that he believes violates the Constitution.

Professor Scott Fullwiler has suggested an even more creative way around the debt ceiling: Fullwiler notes that Fed is the monopoly supplier of reserve balances, but that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum coins). Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed (for more details see here). Curiously, the President won’t pursue any of these options. What’s the problem?

If, for example, the President genuinely believes that the 14th Amendment does not give him the right to ignore the debt ceiling, he has been loath to give any reasoning for this publicly. Why not? He is, after all, a constitutional law professor. Yet, much like the single payer option during the health care debate, the President refuses to put the legal argument on the table, even as a negotiating posture. Is it caution, or does the President genuinely believe this guff about the deficit?

By the same token, the President might well dismiss Scott Fullwiler’s idea as nothing more than a “gimmick”. But if the alternative is something which (in the words of Mr Geithner), could create “catastrophic damage across the American economy and across the global economy”, then why not deploy this “gimmick” to avert a default?

After all, as Bill Mitchell has pointed out:

“[T]he whole edifice surrounding government spending and bond-issuance is also ‘just an accounting gimmick’. The mainstream make much of what they call the government budget constraint as if it is an a priori financial constraint when in fact it is just an accounting statement of the monetary operations surrounding government spending and taxation and debt-issuance.

There are political gimmicks too that lead to the US government issuing debt to match their net public spending. These just hide the fact that in terms of the intrinsic characteristics of the monetary system the US government is never revenue constrained because it is the monopoly issuer of the currency. Which makes the whole debt ceiling debate a political and accounting gimmick.”

The fact is that when a President really wants to spend money, he can almost always find a way to do so. During the Clinton Administration, Treasury Secretary Rubin and Deputy Treasury Secretary Summers did an end-around Congress (which was seeking to prevent the use of government money as support for a bailout of Mexico – or more accurately, a bailout for Wall Street banks which had foolishly lost money investing in Mexico) through the deployment of the little known “Exchange Stabilization Fund”.

Until then, the ESF had been an obscure entity, the Treasury’s own honey pot, established by a long-forgotten provision in the Gold Reserve Act of January 31, 1934 for the purpose of stabilizing the exchange value of the dollar. The ESF was certainly not created simply to help the President go around the backs of Congress. Yet the President did it and in effect called the GOP’s bluff (and, for the record, the Republicans never went to the courts to challenge the decision; they waited for the far more important event of the President having sexual relations in the White House with Monica Lewinsky before going the legal route).

To be sure, one can argue that Mr. Clinton was serving his patrons on Wall Street, when he performed this action. But whatever the motivations underlying the use of the ESF, it made clear that Bill Clinton wanted to spend government money and got his Administration to find ways around the opposition of Congress. Call it a gimmick, but however questionable the motives underlying the action, it showed a President prepared to fight for what he thought was an important objective. Clinton certainly didn’t try to jump ahead of Congress on this issue. He fought them. Arguably, it set the stage for the more aggressive fight to keep the US from defaulting in 1995, during which the Gingrich-led Congress sought to shut down the government by initially refusing to sanction an increase in the debt ceiling.

By contrast, this President has apparently fallen in love with the idea of being the biggest deficit hawk in Washington, DC. In fact, last Sunday, the White House chief of staff, William M. Daley, said on “This Week” on ABC that Mr. Obama would continue to push for a major deal to reduce the deficit. “Everyone agrees that a number around $4 trillion is the number that will make a serious dent in our deficit,” Mr. Daley said. “He didn’t come to this town to do little things. He came to do big things.”

“Big things” – like destroying the New Deal and what’s left of The Great Society. Who knew this is what Obama meant when he said he wanted to be a “transformational President” like Ronald Reagan? He’s gone a lot further than Reagan dared to contemplate on the issue of entitlement cuts. President Obama actually believes this poisonous nonsense about the US on the verge of becoming “the next Greece”. This was confirmed yesterday by Press Secretary Jay Carney, who said of McConnell’s proposal that it was not the President’s “preferred option.”  McConnell’s proposal for avoiding debt default — to transfer full power to raise the debt ceiling to the White House for the remainder of Obama’s current term, cutting Congress out of the process — does nothing to address deficit reduction, Carney said. And Obama is set on making sizable cuts.

Yet again, the President shows profound confusion on the issue of the deficit. He fails to understand that if private spending is lagging then public spending has to fill the gap. Otherwise output and employment growth will be sluggish if not negative. To cut into the huge pool of unemployed and underemployed labor, employment growth has to be faster than labor force growth, which means that real GDP growth has to be faster than the sum of labor force and labor productivity growth.

These facts are very simple and indisputable. Cutting public spending at this juncture is the last thing the US government should be doing. Yet this President is pushing for the largest possible cuts that he can on the Federal government debt. He is out-Hoovering the GOP on this issue. He is providing “leadership” of the sort which is infuriating his base, but should endear him to the Tea Party. This is “the big thing” for Barack Obama, as opposed to maximizing the potential of his fellow Americans by seeking to eliminate the scourge of unemployment. Instead, his big idea is to become the president who did what George Bush could not, or did not, dare to do: cut Medicare, Medicaid and Social Security. What more could the Tea Party possibly want?

21 responses to “Barack Obama: America’s First Tea Party President

  1. Marshall, jumbo platinum coin seigniorage isn't specifically authorized by the constitution. The US Mint was given the authority to create 1 oz. platinum coins of arbitrary face value in 1996. Since the option of using coin seigniorage exists for the Administration, it can't be true that the debt ceiling is unconstitutional, simply because its existence doesn't prevent the President from spending Congressional Appropriations.In fact, since the coin seigniorage option exists, and appears to be the only way for the Executive to uphold his responsibility to continue spending Congressional appropriations in spite of the debt ceiling, it must be the case that the President will have a duty to use jumbo coin seigniorage if the Congress can't agree on raising the debt ceiling before the Government exceeds it. The link is here: http://www.dailykos.com/story/2011/07/11/993352/-Coin-Seigniorage,-the-Debt-Limit,-and-the-Presidents-Duty?via=history

  2. @Marshall "Tea Party has anything like a genuinely coherent political platform" True, but there is no reason the KC folks can not help unite progressives with Tea Partiers. TP folks don't like fine public spending? Fine. Let's agree with them and support them to cut taxes. Fiscal optimization requires maximizing public spending (or cutting taxes!) while operating constraints at full capacity to maximize the production of goods and services.Fiscal policy of a currency issuer is essentially a tool capable of maximizing output within a resource constrained marketplace. Government as the currency issuer can operationally maintain optimal deficits indefinitely because government debt is a digital resource, a digital account of currency users savings in banknotes, deposits, and treasuries. Government is fully capable of operating those real constraints at full capacity indefinitely and chooses not to when constraining the deficit.Change the frame. Change the Game.

  3. Joe, coin seignorage might not be the only way "roidubouloi”, with “years spent in one of the premier commercial banking legal practices in the country” has a couple other suggestions at Ron Paul’s Surprisingly Lucid Solution to the Debt Ceiling Impasse and The Debt Ceiling: Why Obama Should Just Ignore It both at The New Republic site. Seems one idea is for the Fed to directly hold Treasury checks, which apparently don't count as debt for the arcane purposes of the debt ceiling and prohibitions against the Fed directly borrowing Treasury bonds. But as Marshall reminds us, the problem is even more one of will. Obama seems to want to wreck our and much of the world's economy.

  4. It’s really not about economic technicalities; the enemy couldn’t care less about these things, they are at war. As republicans did care about deficits and debt when they are in charge of the executive power.Bill O’Reilly at 60 minutes:“It’s a war Charlie. You do understand it’s a war?”What Obama understand or want to understand is by now irrelevant, he is well beyond Rubicon, a traitor to those he promised to represent. A fifth columnar, a Quisling. Thousand times more dangerous than any tea party, Bushes or Reagans — known enemies.The later mentioned aren’t or was traitors to their “base”, rather the opposite they are and where simply doing their job as frontline figures in a vicious class war that doesn’t take any prisoners.

  5. It works exactly like Craig said – the system is sustainable as long as they issue more currency, the debt ceiling exists only because the law simply cannot say: go on Mr. President – waste as much as you like because WE people will be happy to pay for all your debts and wars and bankruptcies.

  6. Joe, I would argue that the 14th amendment is a more promising route to adopt. In the extreme and unlikely scenario that all other options for preventing a default on the public debt had been exhausted, the President could act pursuant to “emergency powers” inherent in the presidency, possibly taking action of “very dubious legality” because the President acts when no one else will act. Congress could challenge the constitutionality of the action, but in the meantime, it gets us past D-day. And if the court affirms the view that the 14th trumps the debt ceiling, then we're through with these ruinous negotiations forever.

  7. Maybe not the place for a technical question, but I still don't understand this: "The Fed is the monopoly supplier of reserve balances." If "loans create deposits," why don't those deposits create reserves? In other words, how do you differentiate between total deposits and reserves?

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  9. Anonymous,Loans come first. When a bank makes a loan, it credits the borrower's bank account. Reserves do not come into play at all. Suppose the borrower delays spending for a few weeks. The bank may or may not need to acquire additional reserves in order to comply with the Fed's legal reserve requirement. If the bank is "short" and needs to acquire additional reserves, it can: (1) borrow in the fed funds market; (2) borrow from the Fed; (3) sell an asset. If it does (1) or (3), the bank will gain reserves, but the banking system as a whole will not. If it does (2), then the bank and the banking system as a whole will gain reserves.

  10. No question Obama has carried the torch from the Bush administration..So anti-war activists had to settle for issues such as "don't ask don't tell" as he carried through the neocon agenda. Well documented on this site how Obama has been nothing more than Wall Street's lap dog. The two party system has regressed to name brand recognition ..would you like Coke or Pepsi?

  11. @David T "waste as much as you like because WE people will be happy to pay for all your debts and wars and bankruptcies." we don't "pay" for the debt – it's just a digital account of currency users savings in banknotes, deposits and treasuries. the risk of growing government debt to fast is inflation. if users decide to save and we grow the debt to slow you risk suffocating the economy – like we are seeing today. Having said that.. bankruptcies from an operational standpoint reward bad behavior chew up spending that could of been used for something productive – like R&D for next gen technology or god forbid education and healthcare

  12. Marshall,This is an excellent post.Obama is not the first Democratic leader to get out in front of the Republicans on the deficit. Going back to the mid-80's formation of the Democratic Leadership Council and, later, Bill Clinton's "Third Way" Democrats, there has been a strong Democratic emphasis on "fiscal responsibility" accompanied by a backing away from New Deal / Great Society reforms.BTW, not to quibble, I would stick to what Obama says and does; determining what a politician "actually believes" is usually fruitless.Your post spells out the main issue with Obama. Now what we need is for a MMT proponent – Warren Mosler? – to announce for President in 2012.

  13. Hi Calgacus, If the Ron Paul plan is to be used the Fed gas to take a balance sheet hit, so why should they agree? And, also his alternative needs Bernanke to play ball.That's also the problem with the alternative of the Fed holding Treasury's checks. It needs Bernanke.Also, on the suggestion that the ceiling can be ignored by the President. That can certainly be done. But if the President decides to ignore a law when he need not ignore it because he has a perfectly legal alternative to debt authorized by Congress to allow him to spend appropriations , then he has clearly violated his oath of office. If I were the Republicans, I would not at that point bother with law suit. I'd impeach him.Marshal, you said:"In the extreme and unlikely scenario that all other options for preventing a default on the public debt had been exhausted, . . ." But my point is that all other options won't be exhausted and that, in particular, the jumbo coin seigniorage would exist. So, what's more promising, a constitutional crisis with grounds for impeachment, or simply making the legal tender and depositing at the Fed and going ahead with spending Congressional appropriations?It seems to me that coin seigniorage is much less disruptive and much smoother in operation. One day Congress is refusing to act and the next the President is telling them, "don't bother, I've used the authority you gave the Executive Branch in 1996 to render the debt ceiling a moot issue. Sorry, I didn't think of it before, but I didn't know about jumbo coin seigniorage until a few days ago."

  14. I am starting out with MMT, so please be kind. What happens when gov't spends (increased deficits) but a large portion of people don't "use" the money or don't put it in the bank?

  15. @Anonymous – great question. "savings" doesn't impact the economy until it is spent. so for example, china chooses to save and essentially bury their assets in the ground instead of spending them. So if the currency issuer doesn't recognize it and act according the economy will start to suffocate. burying savings or let's say burning money causes the issuer no harm it just needs to recognize what's going on and act accordingly. understanding "savings" at a macro level is crucial to understanding monetary operations. check out this page i've made with a few diagrams to help explain.

  16. Joe – I meant the suggestions in the comments more than the Ron Paul plan – they suggest coins are not the only way to go. The Fed would have to go along with depositing the coin in the Treasury's account, so we need Bernanke for coin seignorage too. My feeling is that Treasury check-kiting would be the closest to business-as-usual, with all its good and bad points, while the coin caper would be more of a bully pulpit teaching moment where the man behind the curtain is finally revealed. I strongly doubt Bernanke would or could legally oppose whatever plan chosen, the Fed after all is a part of the government, and bound by its laws. But surely Marshall is right. These legal loopholes exist. And they could be used ex post facto to dot the is and cross the ts, even after a president defied the debt ceiling on constitutional grounds. But the problem is the president we have is the anti-FDR.

  17. Three things I've learned about Barach Obama:(1) He knows almost nothing about economics. [This was confirmed to me when he had trouble during a press conference remembering a "really hard" economics term: Money Multiplier. It was clear that he was trying to recall it from being told about it, and not because he knew what it was. (Never mind that it doesn't exist, and even if it did, it was not applicable to the situation he was trying to describe.)](2) He never talks about constitutional issues as constitutional issues.(3) He never talks about community organizing.Curious, these last two. One would think that these would be among the things he spoke about often and with great comfort. But no one's home.There's a word around my neighborhood we use to describe people like Barach Obama. We call them "Players."

  18. Call me Incongruous. Big coins make about as much sense to me as yap – I get it, but why should I have to?I have unfashionable beliefs. The problem is that thieves and war criminals roam freely inside the beltway, and jet above us in Fly-over country, but vigilante indignation is heaped on a white trash woman who may or may not have killed her child. Would that a viper shrew like Nancy Grace would beat the drum that Eric Cantor should fear the loss of his "manhood", such as it is….

  19. As a Tea Party member, the premise of this article is hilarious. Where precisely is Barack Obama's actual line item budget reversing even a small fraction of his administration's increase in government spending? Have you ever thought for a moment that Obama is simply lying his ass off to get reelected? Judge Obama by what he actually does and not by what he says.

  20. @Anonymous – great question. "savings" doesn't impact the economy until it is spent

  21. If "loans create deposits," why don't those deposits create reserves?