POLITICS NOVEMBER 4, 2008
If history is any guide, the decisions that a President-Elect Obama makes over the next few months will shape his administration. By the end of February, he will have to define his top domestic priorities, submit a budget, and begin the difficult process of unwinding America’s combat presence in Iraq. The good news is that the terms of his victory likely will have left him some room to maneuver. The not-so-good news is that expectations are sky-high and that some of his supporters will press him to throw caution to the wind and emulate FDR’s first 100 days, or LBJ’s feverish legislative pace in 1965 and 1966. This is a temptation Obama would do well to resist. Despite today’s crisis environment, there are economic and political limits to government activism that the president-elect will ignore at his peril.
The economic pressures on Obama will be intense. He will assume responsibility for implementing a $700 billion financial rescue plan, the ultimate costs of which are almost impossible to assess. Economists of every ideological stripe are recommending an additional fiscal stimulus package of at least $200 billion (some say $300 billion) to counter plunging demand and the threat of deflation. These measures alone will bring the budget deficit within hailing distance of $1 trillion, a number that will give many Americans sticker shock. The president will then have to decide how much of his ambitious investment agenda--in energy, health insurance, infrastructure, education, and many other areas--he can put on top of a budget mess not of his making.
Some of Obama’s advisors are urging him to set aside budget limits, at least in the short term, and their arguments are substantial. The financial rescue plan, they argue, is an up-front investment that will see substantial portions repaid, so simply adding it to the deficit total is an analytical mistake. If ever there was a case for a major Keynesian stimulus, they add, that time is now. Indeed, the costs of caution may well be greater.
So far, so good. But the investment agenda (as distinct from the stimulus package) does represent an addition to the long-term spending baseline. The risk is that at some point, the rest of the world will become less willing to finance an orgy of American deficit spending and will demand higher interest rates, which could torpedo prospects for sustainable growth. The new administration will have to judge where that point is and be willing to change course if its first guess about the tolerance of global lenders turns out to be wrong.
These considerations suggest that it would be wiser to begin by plucking low-hanging fruit--for example, with the children’s health care legislation vetoed by President Bush--rather than plunging into the expensive task of subsidizing health care premiums for all currently uninsured Americans. In the same vein, many states have infrastructure projects that they have authorized and approved, but will have to defer because of declining revenues. Giving the states the wherewithal to proceed with these projects as part of the stimulus package may be more prudent than leading off with a long-term infrastructure commitment.
In making these decisions, Obama should keep four realities firmly in mind. First, the people will expect Democrats to act as a governing majority. That means agreeing on an agenda for the first two years and then getting it done. The more ambitious the agenda, the more likely it is to fall victim to entrenched political realities, and failing to strike a workable balance between ambition and political feasibility would invite a repetition of the 1994 mid-term disaster that left Bill Clinton on the defensive for the remainder of his presidency.
Second, Americans will expect some tangible short-term gains. While the first two Clinton budgets built a foundation for long-term economic growth, they did less to improve the immediate circumstances of middle-class families. This otherwise admirable restraint proved politically costly. President Obama should strike a more sustainable balance. Beyond health insurance for children, he could elect to include elements of the middle-class tax cut--such as an increase in the EITC, a homeowner’s credit for non-itemizers, and a credit partly offsetting payroll taxes--in the stimulus package
This leads to the third reality: Campaign promises matter, and incoming presidents should do their best to honor them. Bill Clinton promised a middle-class tax cut, but once in office felt compelled to defer it, at some cost to his credibility. President Obama should redeem his own tax pledge, which played a key role in his campaign. Failing to do so would revive--perhaps for decades--the Republican charge that Democrats promising tax cuts are not to be believed. By contrast, doing it early would reinforce the “promises made, promises kept” theme that should be at the heart of the new administration.
Which brings me to my final point. Like Bill Clinton in 1993, Barack Obama will take office with the public’ s trust in government at rock bottom. (According to the mid-October CBS/NYT survey, just 17 percent trust the federal government to do the right thing all or most of the time.) The Clinton health care proposal foundered in part on the shoals of public mistrust. Grudging public support of the financial rescue plan does not imply broader confidence in the government as the agent of honest and effective public purposes. As with the financial markets, there are limits to what the political market will bear, and President Obama should be careful not to overstep them. By giving early emphasis to reforms such as shutting the “revolving door” for lobbyists and government officials, ending non-competitive contracts, and guaranteeing transparency for government meetings, Obama can begin to persuade cynical citizens that it won’t be business as usual in Washington. By cutting waste, such as subsidies for private student loan providers and private competitors to Medicare, he can begin to rebuild confidence in the integrity of the federal budget process. Only in this context can his investment agenda be seen as a long-overdue reordering of the nation’s priorities rather than as a return to tax-and-spend governance.
In short, 2009 is not 1965, when fully 70 percent of the people trusted the federal government. To govern effectively, the new administration cannot presuppose public confidence. It must earn it back, deliberately and step by step.
William Galston is a former policy advisor to Bill Clinton and current senior fellow at the Brookings Institution.