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Go Home Two More Reasons Obama Wanted a Deal

JONATHAN COHN JULY 24, 2011

Two More Reasons Obama Wanted a Deal

BY JONATHAN COHN

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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.

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Last year Obama traded extension of the Bush tax cuts for extension of unemployment benefits. Now one year later he's ready to make essentially the same trade. Call me callous, but paying people not to work is all Obama can think of. Cohn's idea of dropping cash from an airplane makes more sense.

- rayward

July 24, 2011 at 11:27am

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Cohn, not everyone thinks it's that dire if we S & P downgrades. Here is a report by Wells Fargo: https://www.wellsfargo.com/downloads/pdf/com/research/special_reports/USTreasuryDowngradeImplications_7212011.pdf T They're not alone. MacroeconomicsAdvisers said, "The debt ceiling could be raised before the Treasury runs out of cash but Treasury debt downgraded nevertheless. We believe this would have minimal effects on financial markets or the economy." http://macroadvisers.blogspot.com/2011/07/debt-ceiling-delay-equals-growth.html A downgrade might make the admin particularly jittery about fiscal stimulus. Hard to justify when you lost your credit rating, but the credit agency downgrade does not necessarily spell trouble for the economy.

- darklayers

July 24, 2011 at 11:49am

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rayward, you are callous. Remember, there are currently five job seekers for every opening. Do you really think unemployment insurance is about "paying people not to work" (implying that those people simply prefer being paid not to work over working)? Have you ever been unemployed? What should those who want to work but can't do for income? BTW, injecting money into the economy at the low end is highly stimulative (because income-strapped people will spend it quickly), compared to, say, tax cuts for the rich.

- ramcat

July 24, 2011 at 11:56am

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I'm a big fan of unemployment compensation because the unemployed are customers and customers are the real job creators in our economy. Unemployment compensation can be and has been abused, but I still think that customers are the job creators, not people whose portfolios are invested in stocks so they pay a top rate of 15%.

- Nusholtz

July 24, 2011 at 1:38pm

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I think the general tenor of rayward's complaint (assuming I have a decent grasp of his politics) is that we should be paying people to work instead of settling for unemployment insurance. And there is a point to that argument. Remember, unemployment insurance is insurance: it's a temporary stop-gap measure meant to tide people over until they get a new job. The fact that many people are hitting the stage where they are 99 weeks out of work means that while this program may help people stay afloat, they are slowly sinking anyway: being out of work for that long saps your drive and leads to skill/discipline deterioration. It also exacerbates social pathologies. Much better is a proposal that directly employs and, as a result, retrains the long-term unemployed. Of course, such a program involves spending more on the unemployed than we do now--it's more akin to several New Deal programs. But if it's well directed, we've shown with the New Deal (and the stimulus, if you take it in proportion) that we can drive unemployment down several percentage points if we follow Keynesian principles faithfully. That's our best shot for transitioning to an expansion and most substantial quick-acting formula to reduce the deficit. The problem here, though, is the Congress: we have a Republican leadership that has greyed that checkbox out. And it's maddening. So much unnecessary suffering, all for the fact that our "true patriots" prize a priori principles and zero-sum politics over the health and welfare of the country.

- chaitless

July 24, 2011 at 1:55pm

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At least the focus is on the road ahead. I'm not convinced that ratings are very significant to those who scoop up millions of treasury issues at any one time. Those folks have economists and they don't rely much on rating agencies.

- Doug12

July 24, 2011 at 2:43pm

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"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?" Probably not and definitely not are the answers there. Will be interesting to see what the final deal is but you'd have to say their thinking makes sense. Any deficit reduction deal, for me, can be judged by whether the Bush tax cuts become permanent; especially for the higher earners. If Obama can get reductions in spending and hold onto that card for 2012, then it's all positive. Regardless, of the screams from the Left. If he gives that away, then it's a net loser and a potentially serious betrayal of the voters trust.

- IggyPop

July 24, 2011 at 2:43pm

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- Though framed in policy I'd think your reasons would only be proved wrong during a time (next year) when we'll be in a negotiating black-out. The proof I'm correct is in the willingness of the GOP to postpone this right back into the campaign. If only Obama had an abyss to set the opposition on in the Summer of '09 and voters could face stark choices with healthcare reform? Right or wrong I'd prefer the pros speak to voters rather than the Tea Party. Crisis doesn't always weed out bad politics but doom sure as hell focuses the most cynical on the price of picking the wrong side.

- michaelg

July 24, 2011 at 5:05pm

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I'm all for putting people directly to work -- WPA 2.0, if it were up to me. Of course, it's not up to me. But I wish there were more attention to the FAST proposal that Jared Bernstein has been talking up. (Funds school repair/renovation/rebuilding, putting construction workers back on the job while simultaneously fixing up schools that need them...) Obama's infrastructure bank seems like a pretty good idea too.

- Jonathan Cohn

July 24, 2011 at 5:19pm

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I'm all for putting people directly to work -- WPA 2.0, if it were up to me. Of course, it's not up to me. But I wish there were more attention to the FAST proposal that Jared Bernstein has been talking up. (Funds school repair/renovation/rebuilding, putting construction workers back on the job while simultaneously fixing up schools that need them...) Obama's infrastructure bank seems like a pretty good idea too.

- Jonathan Cohn

July 24, 2011 at 5:19pm

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That raises all sorts of democratic questions then Malahat. One would have thought the rating agencies would not want to force the President's hand after helping to create the disaster in the first place. (AIG was triple A the day it collapsed.)

- IggyPop

July 24, 2011 at 5:21pm

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" (Funds school repair/renovation/rebuilding, putting construction workers back on the job while simultaneously fixing up schools that need them...)" We're trying exactly that programme. http://www.irishtimes.com/newspaper/ireland/2011/0509/1224296491975.html http://www.irisheconomy.ie/ The above link is well respected access to our fiscal debate, which is starting to resemble your own. (If you exclude "our" unpayable, under any interest rate, bank debt),

- IggyPop

July 24, 2011 at 5:39pm

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Those are interesting points, Malahat, but a converse applies too. In terms of this question about markets, many investors ultimately believe that eventually the US will work things out. Here's what Tom Gallagher said, "That’s the last point, markets are giving policymakers a huge benefit of the doubt by assuming future deficits will be made sustainable. That’s a leap, but that’s what history tells you — the US has never let deficits run at a damaging level for a sustained period." This could turn out to be the case. Here are some ways this could work out: -Chait's scenario with the Bush tax cuts -Wars wind down -Some entitlement reform (higher deductables for affluent seniors in the model of Center for Budget and Policy Priorities with Medicare, slowing the growth rate, and IPAB board, chained CPI with sweeteners like an enhanced earned income tax credit) How would the credit rating agencies look if this stuff eventually occurred? They missed the financial crisis, but downgraded the United States which successfully preserved and expanded its legacy as the world's safest financial market?

- darklayers

July 24, 2011 at 6:48pm

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I guess I disagree. I think the markets reaction you mention reflects the wrangling over the debt ceiling, and a big consensus deficit reduction plan is not essential to calming them. As Paul Krugman writes, the credit rating agencies should not necessarily be equated with the markets, "The point is that when S&P or Moody’s speaks, that’s not the voice of “the market”. It’s just some guys with an agenda." These data bear out that assertion: http://www.alliancebernstein.com/CmsObjectABD/PDF/Research_WhitePaper/Treasury-Downgrade_110706.pdf

- darklayers

July 24, 2011 at 7:57pm

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WPA 2.0 would be great. Beyond that, the problem JC points out - that non-elected business people are essentially making policy - is serious and deserves to be discussed. Of course nobody died and elected the corporations either did they.

- Sophia

July 24, 2011 at 9:09pm

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Look S&P, if you are going to start dictating what the ends have to be for our debt deliberations, can't you at least realize that when Republicans say they will cut $4-9 trillion, just like that, with no increased revenue, then that means our economy is not coming back, we will run deficits for a generation, and you should instantly downgrade us? Because these ratings agencies are trying to have it both ways, as a non-interested, market-neutral actor only trying to see us be responsible with our budgeting. Hello! Moving rightward of Bowles-Simpson means an even worse deficit outlook. Of course, it would be hilarious and obvious that we should ignore them if they start saying that until the US passes "credible" health care reform along the lines of the Ryan plan, they will likely downgrade us. That would show them to be completely useless and validate what many people already think about their prognostic abilities. But here, they do something that is slightly useful by injecting themselves into the political process*, but then abdicate market responsibility by pretending like whatever Congress comes out with, as long as the debt ceiling is out of the way, we will reassure investors who are starting to look into our books that we can meet our "medium-term" debt obligations. Risible. *Any other country would have had a run on its credit by now. We hold on to aged meaningless institutions that make economic management a nightmare, we chronically undertax our citizens (and then the rich among them use tax shelters or game the system), we have a frayed social safety net and for that reason see the costs for it spiral out of control. I mean, I know we're not Greece, but running shenanigans for two months to only-maybe-just-in-the-nick-of-time comport with an admission that we will pay our bills on time--that's the kind of behaviour that attracts the market sharks to ravage what economic hope a country ever had to begin with. (And that's the way Republicans have wanted it to be. It's their self-fulfilling prophecy. Glenn Beck is whacking off right now because while at the time what he said was far-fetched, he was able to get behind a political movement that made the unthinkably treasonous possible.)

- chaitless

July 24, 2011 at 9:09pm

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Last year Obama traded extension of the Bush tax cuts for extension of unemployment benefits. Now one year later he's ready to make essentially the same trade. Call me callous, but paying people not to work is all Obama can think of. Cohn's idea of dropping cash from an airplane makes more sense. It's not just callous, it's dumb. It's not "all Obama can think of," it's all Obama can get Congress to pass.

- RerunStubs

July 24, 2011 at 10:43pm

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I don't recall ratings agencies making calls on the viability of nation-states even ten-fifteen years ago. Is this something new or did I/we just miss it because it wasn't important? How would S&P or Moody's have reacted to FDR's New Deal, for example? They would have downgraded the U.S. due to all that new spending and government help, probably. So what exactly is different in 2011, can anyone explain?

- ironyroad

July 25, 2011 at 4:52am

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Thanks malahat. I have to note, however, that, to my layman's eye, now is not unlike other periods when we had a grim combination of war and economic crisis to wade through. If you follow the logic of this graph, then the rating agencies would have had to downgrade the U.S.'s status in 1945, the moment at which we became the greatest superpower the world had ever seen. So in a way my question still stands.

- ironyroad

July 25, 2011 at 7:52pm

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But would the rating agencies have taken that into account at all? That's my question malahat -- it seems to me that if they had operated as they do today, they would have condemned any intention to use the savings generated by the end of hostilities to build new infrastructure and invest in education and scientific research, and demanded that the government cut spending.

- ironyroad

July 26, 2011 at 9:07am

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