JONATHAN COHN JULY 24, 2011
Why has Obama been so willing to make a deal on deficit reduction, even if the terms reflect Republican values far more than Democratic ones? The president himself offered some reasons in his press conference on Friday. Observers like me have speculated about others. But administration officials say that two other factors, both related to the economy, weighed on their minds.
Obama and his advisers are looking at the same job numbers as the rest of us. And they think this budget deal could be their best, if not last, chance to get legislation that would boost consumer demand and jobs. According to a senior administration official, Boehner last week had indicated his agreement with an extension of unemployment insurance, some kind of renewal of the payroll tax holiday, and at least some "language" about future funding for highways. Together, those steps would likely have pumped about $160 billion, maybe more, into the economy over the next year.
I checked with a few economists. The consensus was that, very roughly, such a stimulus would lift gross domestic product by 1.5 percentage points. That would translate to about a million additional jobs.
The second reason was concern about the nation's credit ratings and how that factor might influence the economy. When this episode started, and Republicans first began threatening to block the higher debt ceiling, the ratings agencies indicated they would react by lowering America's credit rating if the U.S. defaulted. But recently S&P has indicated it was effectively making a second demand of lawmakers: Simply raising the debt ceiling isn't good enough. Now an agreement must also put forward a credible plan for long-term deficit reduction.
Ezra Klein had the details about this problem in an item last week, including an interview with the head of S&P's sovereign ratings division. It's a pretty brazen intervention into policy-making by a group of people that nobody elected and whose judgment, or lack thereof, played a pivotal role in creating the 2009 financial crisis. But it's also a fact of life right now. According to estimates by Third Way, a downgrade could raise interest rates and reduce employment by 650,000.
Would rating agencies really downgrade America based on the contents of a debt ceiling deal? Could the administration could get economic stimulus separately from a debt deal? I really don't know. But it seems likely that these considerations have played at least some role in the administration's thinking -- and will continue to do so as the default deadline approaches.