OCTOBER 22, 2008
In 1992, Bill Clinton ran for president promising a bevy of expensive spending initiatives: assistance for college tuition, new public works, not to mention a massive universal health insurance plan. "In the absence of increasing investment in this country," Clinton said, "you can't get growth going again." But critics insisted the budget had no room for such extravagances--a belief Clinton eventually embraced. "We're all Eisenhower Republicans here," he famously told his cabinet, as he signed off on a budget that ditched spending proposals in order to reduce deficits.
The parallels with 2008 are unmistakable. College tuition assistance, infrastructure spending, health care reform--they're all in Barack Obama's agenda. But, with the government likely on the hook for some kind of Wall Street bailout, critics say there's no way Obama can follow through. "How can you expand health care coverage when the country is broke?" Mike Allen and Jim VandeHei asked in Politico. Even Obama himself recently indicated that "a range of things ... are probably going to have to be delayed."
All presidential campaigns over-promise. But the perception that Obama must radically pare back his ambitious spending proposals--a perception widely shared in Washington--makes several fundamental errors. For one thing, it misunderstands the nature of a Wall Street "bailout"--which, properly constructed, shouldn't seriously deplete federal funds. More important, the conventional analysis ignores the fact that we face deep economic problems besides the financial crisis--problems that only government can fix. The case for Obama's spending agenda hasn't suddenly become weaker. If anything, it's actually grown a bit stronger.
Consider what's happening on Wall Street--and why we even care about it. The worry is that banks will stop lending money, slowing down an economy that already seems to be in recession. The solution, many economists agree, is to put more money into circulation. Since the Federal Reserve can't do that by reducing interest rates as it has in the recent past--rates are already very low--the government must inject money directly, by giving out more than it takes in. Tax rebates for the poor and middle class, who will likely spend the money quickly, are one way to do that; public assistance programs like unemployment insurance and Medicaid are another.
But it's not the quick economic stimulus that worries most observers. It's the initiatives that represent longer-term claims on the federal treasury. The college tuition assistance Obama has proposed wouldn't disappear after one or two years, when the economic downturn (hopefully) ends. Neither would the investment in early-childhood programs.
Obama would have the government grab some new revenue, too, thanks in part to a cap-and-trade scheme that would effectively tax pollution. If you grant the campaign some favorable assumptions, then, taken as a whole, his agenda might not change the government's year-to-year bottom line that much; in fact, annual deficits could even start to come down a little. But that would still mean producing budgets full of red ink. This year's shortfall, after all, should be more than $400 billion. And, since it was large deficits that helped convince the Clinton administration to forgo its spending initiatives, it's easy to see why many expect Obama to ditch his.
Cohn gives his defense of Obama's spending plan
But is the budget picture really the same as it was back then? In some ways, it's actually better. The overall debt burden right now--that is, the total amount of money the government owes to creditors--is actually smaller, relative to the economy as a whole, than it was during Clinton's first year. Today, debt relative to gross domestic product is just 37 percent; in 1993, it was 50 percent. (The historical peak was 109 percent, during World War II.) Another key difference is interest rates, which are much lower today. So not only would Obama inherit a government less burdened by debt than Clinton's; he'd also inherit a government that could borrow new money more cheaply.
At the same time, the long-term picture Obama would face is just as bleak, if not bleaker. The reason is Medicare and Medicaid, whose cost is projected to increase much faster than inflation. Just meeting those obligations, along with promises made through Social Security, would soak up a huge amount of money. The government would inevitably have to borrow yet more to keep up, diverting money that might go to other purposes. Under this scenario, the Congressional Budget Office predicts that the country could actually start to get poorer--that is, national income would decline relative to inflation--sometime around 2060.
This means getting the budget under control in the long run remains imperative. But does that make Obama's spending plans unwise? Not really. That's because the culprit behind the rising cost of Medicare and Medicaid is the overall price of medical care, which the federal government currently has limited power to control. Ultimately, the only hope lies in a comprehensive reform of health care--one that reduces expensive over-treatment while creating a unified system in which it's possible for the government to exert more pricing power. And, while a reform like Obama's might not accomplish that right away, it would take the essential first steps.
Another way to prepare for future financial obligations is to help the economy grow faster, which would increase tax revenue and make the government's debt seem smaller by comparison. But, over the last decade, we've spent too little on educating our workforce and developing infrastructure essential to growth. We've also been too slow to focus on energy independence. It's imperative to make up for that neglect now, particularly given what's happened on Wall Street.
To take one obvious example, businesses could significantly lower their energy costs by updating their offices, stores, and factories to be more environmentally friendly. But that sort of retrofitting requires investing money upfront--money most businesses would have to borrow. And the financial crisis could make that borrowing a lot more difficult. By subsidizing those expenses with tax credits--an idea the Center for American Progress put forward in its $100 billion "Green Recovery" proposal--the government could make the retrofitting possible. This would help wean America off foreign oil while also creating jobs, thereby strengthening the economy.
To be clear, the next administration must remain wary of long-term commitments that won't pay off in improved efficiency or productivity. And that does call into question one element of Obama's agenda: his proposal to increase middle-class tax relief. While defensible as a temporary step to fight recession, it's less sensible as a permanent claim on federal revenues. Over the long run, it would arguably be less effective in spurring growth than investments for the common good--like education--that go underfunded when left to the free market. Plus it's quite likely that, in the long run, taxes will have to go up somehow. Cutting them now only makes that harder.
Arguing for spending in the current climate may sound controversial, but it really isn't--at least among Democratic policy experts. Although some Democrats (like economist James Galbraith and journalist Robert Kuttner) were making similar arguments to no avail during the 1990s, today even prominent Clinton administration veterans seem to agree in principle. In a recent Washington Post op-ed, former Clinton Treasury secretary Lawrence Summers advocated "short-run investments that will pay back to the government over time or those that are packaged with longer-term actions to improve the budget, such as investments in health-care restructuring."
Obama himself also seems to get it, notwithstanding his statement about delaying some projects. Speaking in Wisconsin on October 1, he said, "There are certain investments in our future that we cannot delay precisely because our economy is in turmoil." (The emphasis was his.) To prove it, he went on to promise spending on health care, education, infrastructure, and energy independence.
But Obama's personal commitment may count less than his political skills. More conservative voices, including many in Obama's own party, will insist the budget cannot accommodate such spending. In other words, they will act like it's still 1993. To persuade them otherwise, Obama would do well to remind them that their party has pursued different priorities before. Back in 1932, Franklin Roosevelt promised a balanced budget, then presided over one of the most famous federal spending binges in history. That turned out well, both for the party and the nation. There's no reason it can't happen again.
Jonathan Cohn is a senior editor at The New Republic. This article originally ran in the October 22, 2008, issue of the magazine.