As the US government shutdown was still in effect and the prospect of a debt default loomed, President Obama held an extraordinary and revealing White House press briefing on October 8th in which he clarified his then position vis-à-vis the shutdown and debt ceiling. After the shutdown was (temporarily) ended on October 17th, Obama made a fairly extensive public statement airing his views of how he sees economic policy and government’s role. While I have not followed every one of Obama’s press conferences or speeches, in both of these public appearances, Obama went into unusual detail and lengths to expand on his views of politics, government and the economy. In addition, he marked out his most combative stance vis-à-vis the Republicans to date. Also in his October 17th statement we had the clearest statement for a number of decades, of some of the benefits of having a government at all from a top American political leader.
However, he also, unfortunately, showed via his various seeming improvisations during the October 8th press conference and the end goals he set himself during the October 17th speech, how little he understands about how the economy works and how reluctant or unmotivated he is to use the powers of his office to do good for the broad swath of the American people. Tragically for the American people and for Obama’s legacy, if he takes overall social well-being seriously, the President persists in measuring his economic performance by how much he will have reduced budget deficits or, one surmises, have achieved a balanced budget at some point in the future. Obama, in the October 8th press conference, “unilaterally disarmed” himself of using a multi trillion-dollar platinum coin or other legal means to pay the federal government’s debts by claiming that it would be the equivalent of counterfeiting. Obama either sincerely worships the “Balanced Budget Gods” or is simply a loyal servant of the faction of the political and economic elite, led by Wall Street billionaires, that sees fiscal austerity as in its interest.
In terms of positives that emerged in his recent appearances, Obama made his clearest statements to date about how both he and the press recognize that a minority of the GOP is controlling the Republican Party and how they are funded by a few millionaires and billionaires. Mentioning that he too had had to raise money from millionaires and billionaires to get re-elected, he implied that he thinks this is distasteful and antithetical to democracy (though he has not proposed or pushed forward campaign finance reform while President). Obama’s moments of candor are an interesting contrast with typical “communication strategies” by politicians in Washington yet I find the lack of positive reform proposals in this area troubling: truth-telling alone without positive action from the world’s most politically powerful person is an expression of fatalism or worse. The frank confession of being beholden to billionaires could function politically as bait for progressives to raise his personal likeability (as a truth-teller) while he enacts policy that works against or gives up on the hope for a better life on a broad social scale.
Additionally, Obama in tone and argumentation strategy seems to finally recognize that there is a political problem for him in treating the Republicans as respected, reasonable partners in governing, even as he reinforces their preferred policy and economic framework (more on this below). Though it has taken him a very long time, he seems to recognize that he is in a power struggle with them and that they are determined to exercise power in any way they can to undermine him. Just opening the newspapers of that week would have allowed him to see this as a New York Times published an article which exposed the degree to which right-wing activists had planned to undermine Obama’s Presidency from day one and planned the shutdown for at least ten months.
However, Obama has seemed uninterested, until recently, in a more jaded view of the motives and interests of the Republicans. He has, perversely, protected them from their own extremism for reasons that are complex but not well-founded in reason or ethical commitment to the well-being of the American people. Yves Smith points out that even in these speeches, Obama misdirected responsibility for the crisis in governance away from Republican opponents onto a curious ensemble of “bloggers”, “lobbyists” and “professional activists”. Obama is still shielding the Republicans from the consequences of their behavior and ideology.
In his October 17th statement, Obama with clarity unusual for neoliberal Washington laid out the case for needing a government at all to a public used to officials celebrating the efficiency and benefits of markets over government. Obama enumerated some of the services delivered by government that were missed during the shutdown and pointed out how valuable they are. Still, stated compactly, Obama also made an equally clear statement of how he thinks a Grand Bargain, which cuts Social Security and Medicare, is the only solution to what he and groups like Fix the Debt believe are future budget problems. Obama implied that the budget deficit cuts that he had instituted now were not as important and perhaps might be excessive but that the long-term was where the real cuts would need to be made. Like the Wall Street billionaire Stan Druckenmiller and other financial industry deficit hawks, Obama is implying that the old, and soon the aging Baby Boomers are the problem, those who are undeserving of the same or increased levels of public investment.
Now that the debt ceiling has been raised for the next 4 months and the shutdown has ended, Obama’s new stance has garnered a tactical political victory for him and the Democrats and damaged the Republicans. That fighting the GOP is a winning strategy should demonstrate to Obama that he could have achieved more (if he had wanted to) by pursuing a more aggressive stance from day one of his Presidency. Of course, that the federal budget is now fixed for the next few months at levels proposed by right-wing Congressman Paul Ryan is a policy victory for the Republicans, even as the Republican fight with Obama over Obamacare has seemed to have run into a dead-end and their political popularity is at a new low.
Obama’s Post-Crisis Excursion into “Keynesianism”
That Obama might not want to achieve more within his Presidency is an open question; he seems at times to impose limits on or seek to have others impose limits on what might be reasonably to be considered to be his ambitions (aspirations to greatness as a President). Obvious from the news conference and other utterances was the seemingly sincere belief that Obama continues to express in an anti-stimulus, pro-austerity policy orientation, using deficit cutting as the primary and ultimate measure of the probity of his economic performance. While one could extract from his October 17th speech the acknowledgement that any more budget cutting now was not a good idea, the framework of Obama’s economic thinking revolves around cutting federal deficits as the key to long-term economic health (a stance which contradicts the economic data).
Obama may on other occasions, if asked, be able to verbally represent a weak New Keynesian position as a opinion of some economists, i.e. something that “other people” think is a good idea . But unfortunately the loose assembly of concepts under “Keynesianism” in academic economics provides Obama and other policymakers with some confusion or cover for selection of policy according to political fashion, to the assumed bedrock ideals of his Republican opposition, or the whims of powerful patrons rather than economic reality. Keynes himself expressed in an oft-quoted rule of thumb that: “The boom, not the slump, is the time for austerity at the Treasury”, which matches budget deficits or balance with the business cycle and suggests that government budget balancing is a goal in itself. This quote can function as a lens through which most contemporary “Keynesians”, including people like Paul Krugman, view Keynes’s advice on government finance. “Good” New Keynesians like Krugman and others are alarmed by Obama’s early turn to austerity because they and, one would guess, Keynes, would not describe the sluggish economy of 2010-2013 with real unemployment rates hovering around 14 percent or higher as anything close to a “boom”. However these mainstream “Keynesians” feel compelled to worship at the altar of the Balanced Budget Gods and, in this Krugman, for instance, reinforces the same worshipful attitude towards budget balance as the deficit hawks.
Obama can rightfully claim that his Administration put together in nominal terms the world’s largest, though deemed via the analysis of many, inadequately large, stimulus package in 2009 and therefore is not ignorant of at least some of the theory of Keynes. The 2009 stimulus package and bailout of the auto industry appear to be anomalies in the context of Obama’s economic policy despite their magnitude. In spite of the Right’s smears of him as a big spender or perhaps because of them, Obama shows a reluctance to use the tools of government finance for broad economic goals except in the direst economic circumstances; since that stimulus package, we now have in Obama the short-, middle and long-term austerian. Obama and the Obama team have also shed the economic advisors that were more pro-stimulus, with Christine Romer, Austan Goolsbee, and Jared Bernstein all leaving the Administration. Even the now-departed Larry Summers was a stronger Keynesian than Obama’s current economic team.
In the current situation, policymakers don’t have to settle anymore for the vagueness or tolerances for error that stem from holding oneself to some version of mainstream “Keynesianism”, in part a feature of the incomplete nature of Keynes work after his untimely death in 1946. Keynes’s contemporary Kalecki already had theorized a relationship between trade deficits and budget deficits in 1942. Abba Lerner, another Keynes contemporary, formulated in 1943, the idea of a “functional finance” for government that targeted full employment via government spending and the proper sizing of budget deficits. However, it would take thirty five years after Keynes’s death for Wynn Godley to formulate a stock-flow consistent framework of macroeconomic accounting, now used by the Modern Money School (MMT), which, as it turns out, would make obsolete the mainstream “Keynesian” rule of thumb using the business cycle alone as a guide to government finance.
The fully stock-flow-consistent model of monetary flows takes into account whether a nation is running a trade surplus and deficit and from there recommendations of levels of deficit spending or lack thereof can be made, accounting for as well various public policy goals that are ethical and economic choices on the part of government leaders. In this context, a country with a trade deficit such as the US over the last thirty years, would always have to maintain a somewhat larger government budget deficit than the trade (really “current account”) deficit to maintain economic growth; this trend has been borne out by historical data with the exception of the budget surpluses of the late 1990’s the effects of which were temporarily masked by that era’s asset and debt bubbles. While the Modern Money School and its post-Keynesian component concepts are growing in influence, policymakers are mostly unfamiliar with them, even though a commitment to maintaining or improving social well-being would inevitably lead them in the direction its analysis and recommendations.
Obama’s Fatal Attraction to Contractionary Economic Policy
Obama’s statements during the October 8th news conference were a pure statement of the belief that reducing the deficit and perhaps running budget surpluses as Clinton did were the keys to economic growth or at least fiscal soundness. The economic “braking” effect of the Clinton budget surpluses was temporarily counteracted by the enormous debt-financed asset price boom of the late 1990’s but led in 2000-2001 to a deep recession. Given Obama’s self-presentation, it is unlikely that Obama is engaging only in sly subterfuge; he appears to sincerely think that this is the best or only course and he is surrounded by Clinton era veterans who have a vested interest in believing that the Clinton “formula” is the route to economic success. During the October 17th appearance, Obama shifted the focus to longer-term deficit cutting, seeming to favor a view that there were productive and unproductive government investments, with spending on social insurance falling more into the latter category. In this second appearance, Obama pretty much stated his preference for fashioning the “Grand Bargain” of Social Security and Medicare spending cuts over the long term combined with increased taxes.
Raising taxes and cutting spending at the same time, while it seems to Obama to represent the political “coming together” of the two parties, for which he he seems to yearn, would be absolutely toxic for all but the most overheated, robust, tending-towards-inflationary economy. The current economic reality is that raising taxes and cutting social spending are singly and, even more so, together contractionary economic policy, guaranteed to turn the change in economic growth negative and eventually shrink the economy unless extraordinary and, in the current U.S. context, counter-factual conditions are present (massive trade surplus and/or private credit boom). Contrary to the myths promulgated within parts of academic economics, promoted by powerful think tanks, and credulously believed by many politicians, the market economy is critically dependent upon government to supply liquidity where financial means are lacking or have been drained from the economy, often among the poor and needy and now increasingly the middle-class.
Cutting spending that supports the incomes of the middle-class, working-class, and the poor is a recipe for further economic contraction in the increasingly unequal US economy. Demand is being systematically drained from the economy as a whole by the increasing concentrations of income and wealth. Social Security and Medicare among others, are some of the few supports for ordinary Americans, as their wages and therefore savings, decrease. To cut these income support programs now or prospectively is to be blind to their functions and to the realities of the current economy as well as long-term economic trends. In the form of the proposed Grand Bargain, these cuts would function as a decades-long strangulation of demand in the economy, as we know of no economic trends or government policy that would suddenly flatten the income distribution or redistribute wealth dramatically. The Obama that complains of growing income inequality (not seen very often) and the Obama that calls for the Grand Bargain should get in touch with each other.
The defense of these social spending programs is often couched in moral terms and this is on the one hand a valid way to look at this conflict. However, it is as striking to me how utterly stupid the effort to cut these programs is, purely from the point of view of medium and longer-term self-interest of almost all parties involved. One needn’t place a high value on “tender-heartedness” to realize that this is a long walk off a short pier. The campaigns to fashion a Grand Bargain and cut federal deficits are profoundly short-sighted efforts based on no coherent understanding of how capitalism works.
In the current American political context, unmoored from this reality by the fanciful economics of the deficit hysterics and Obama, raising taxes on the wealthy is considered to be a preoccupation of the establishment political “Left”. Liberal politicians, unaware of how the government finances itself, believe, that this “pays for” social spending and other government programs. It is true that federal taxes can indirectly enable government spending by lowering the risk of inflation that might come from that spending but the current American “Left”, which is more like a Center or Center-Right on a world scale, is not proposing increased spending on anything. Instead, the “Grand Bargain” is simply a political “horse-trade”, where what is damaging to one party is traded for what is damaging to the other party. As a policy, it does not create the positive conditions for maintenance or growth of the American economy and society; it is like a bad divorce settlement where the divorcing couple try to make life intolerable for their former spouse, sacrificing the welfare of their children for the purposes of revenge.
Hypotheses Regarding Obama’s Awareness and Motivations
There are a number of hypotheses, not necessarily mutually exclusive, that one can entertain regarding this fatal attraction to a policy that has a high probability of leading to another recession or depression. Remember these are hypotheses that might reasonably be floated and not my convictions regarding Obama’s thinking:
1) Obama (sincerely) believes that individual economic virtues (i.e. saving money) must apply to society as a whole or government. If everybody saves money, including government, this must be a good thing. If this is the case, he is incapable of understanding or doesn’t want to understand the paradox of thrift.
2) Obama (sincerely) believes that the private sector needs room to grow and, like his Republican opponents, has been “crowded out” by a too-large government. Prosperity will follow the diminution of the public sector. Obama believes that markets will deliver goods and services more efficiently than government and will often take its place. From his time at the University of Chicago, Obama would have imbibed a discourse that normalizes these views.
3) Obama (sincerely) believes, like the GOP, that the private sector owns the currency and the federal government borrows or taxes it from the private sector to fund its operations. Therefore growing social insurance programs will eventually bankrupt the government unless they are down-sized. The notion of a government going bankrupt is possible within this belief system, especially if it is assumed that tax levels cannot be raised very much to help clear room in the economy for social spending.
4) Obama thinks or has been told to believe, as do many, that demand somehow emerges once “confidence” is returned to the private sector, with “confidence” defined by business leaders and bankers. As do most who subscribe to one of a number of “supply-side” theories, Obama has not bothered to ask how then people with stagnant or decreasing incomes that lag productivity gains and GDP growth will support an economic recovery, i.e. provide the necessary demand.
5) Obama does not believe most or all of hypotheses 1-4 but has been able to tell himself to believe them because he is doing the dirty political “front” work for sectors of the financial services industry that support austerity and long-term government fiscal contraction. He is essentially a talented “hired gun”, indifferent himself to the content of policy and what goes on in society, and largely a political “technician”. In this view he could be even be viewed as a borderline sociopath, though this is not entirely necessary to this view: he is just doing a “corporate” job that involves dissimulation and trickery.
6) Obama because of a psychological block or personality complex, cannot identify with the pro-appetitive (i.e. stimulating biological drives) aspects of economics, i.e. increasing demand and spending, preferring instead the restrictive, self-controlled, quasi-“anorexic” appeal of austerity and spending reductions.
7) Obama, as a child of divorce with multiple father figures over the course of his life, has an outsized psychological need for comity between parties that outweighs the political-economic consequences of this need. The “Grand Bargain” is a psychological enactment of this need, with the conservative Republicans and their “stern” ideology playing the role of father figure that must be appeased or won over. Obama’s attempt to re-work his own personal early trauma is not an excuse to impoverish millions and tank the economy.
8) Obama is at heart a progressive but he is so politically savvy that he understands that it is entirely impractical to govern or act as a progressive in the neoliberal era, except in certain circumscribed areas. He must instead attempt to expose Republicans as hypocrites by proposing policies that they would support themselves. Once they are completely exposed as insincere (and one assumes defeated in elections…again), it will then be possible to propose and enact progressive policies.
9) Obama strategically manipulates Democrats and progressives with hints of progressive intentions while in central areas of policy attempting to forge a veiled across-the-aisle alliance with Republicans. Thus Obama attempts to represent the lost, moderate right-wing, Wall Street faction of the Republican Party as leader of the Democratic Party. As it turns out some of the most vocal deficit hysterics (Pete Peterson) originate in the now often-mourned, defunct moderate conservative Republican establishment.
Update: [Joe Firestone points out in the comments an important oversight, which while I was writing this, I did not think to put in. I have considered a similar idea a number of times in the past and it seems to accord with Obama’s behavior and social preferences.]
10. Obama would like to have a similarly lucrative and glamorous-seeming post-Presidency as Bill Clinton has had, with some of the support of the plutocratic class. Not rocking the boat by challenging the current contractionary common sense of, in particular Wall Street, plutocrats, in Obama’s mind, may be the wise “career move”, for his post-Presidency.
Obama’s Personal Choice with Massive Public Impacts
Ultimately whichever of these is true or truer, Obama is making choices to listen or not listen to economic advisors, to submit to his own personal “tastes” or not, and to fight or not to fight. There is a range of policy space available to him and he has chosen a small portion of it to operate within. Even if it is a matter of an unexamined neurosis, he is ultimately responsible for his actions and mastering the neurotic filters which keep him from seeing how the world actually works and how his actions can effect the world.
The portion of policy space within which Obama has chosen to operate will lead, if he and his allies do not change direction or are stymied, to a continuing deterioration of the situation of the poor, the working and middle classes. It will lead to a hamstringing and shrinkage of government at a time when more government services and action are needed for social and ecological reasons. The view of government’s economic role that Obama has subscribed to is a delusion, though a collective one for which there are many social supports among Washington’s and Wall Street’s elites.
Despite having the tools at hand to exert more control over the destiny of his Presidency, Obama is perhaps choosing to gamble with the economy, to hope that an appeal to “confidence” and a repeat of the Clinton boom will occur. This gamble is not only based on a misunderstanding of the role of budget surpluses in that and potentially in this economy but also overlooks the primary fuel for the Clinton boom, a massive bubble of private debt and an unsustainable asset bubble in tech stocks. Or alternatively he is a cynical fatalist, condemning the American people to economic stagnation and the climate to irrevocable degradation and irreversible warming.
You can follow Michael Hoexter on Twitter at @mike_cal