Obama’s second act: Keynes now, Reagan later

by Russell's Rants

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Originally published November 17, 2010

Did you notice? President Obama launched his reelection campaign last week, and he wasn’t even in the country. The first leaks from his Deficit Commission broadly outline the themes on which the president plans to seek a second term: namely restoring long-term fiscal sanity to the American economy. His second-term agenda is as large at his first, but is its political mirror image: taming government in place of bigger government. It’s a great campaign theme, goes against type in a constructive way and ultimately will be successful only if one of his first-term signature programs actually does its job by 2012: that would be the American Recovery and Reinvestment Act of 2009, aka the $787 billion stimulus program, and its yet unfulfilled job of reducing the jobless rate and igniting economic growth. No John Maynard Keynes now, no second term later.

The president plans to do deficit reform in a typically Obamaian manner: a mix of spending cuts and tax hikes. Not blue or red, but his unique shade of purple! This approach has the genius of being able to outflank the Republicans, if not the Tea Party, on the right with the current mix of new taxes to cuts in a reported ratio of 25% to 75%. And by eliminating (some very popular) loopholes and lowering overall marginal rates, Obama has positioned himself to run as a tax cutter like that last transformative president, Ronald Wilson Reagan.

In his first presidential debate with John McCain, Obama said that his top three campaign promises for his first term were, in order: (1) a new energy policy stressing domestic production and alternative fuels; (2) education reform; and (3) health care reform. Indeed, in response to persistent questioning by the moderator of the debate, Jim Lehrer, as to what of his agenda he would have to scale back in light of the onset of the financial collapse, Obama pointedly said none would be taken off the table. As a side note, Obama even rightly predicted that just like an earlier program during the Great Depression, the funds expended to rescue the economy under the Troubled Asset Relief Program (“TARP”) would likely be repaid. The point is that Obama had to go big and spend political capital in ways he did not contemplate in light of the Great Recession (big stimulus, financial regulatory reform) before ever addressing his real priorities (health care, energy, education) – all of which also implicated big, activist government.

What Obama, and David Axelrod, knew was that the president would have only one to two years to get as much of his agenda passed as possible. After that, the mid-terms of 2010 and the onslaught of the campaign for 2012 would make any new significant legislation impossible. And that was before they knew how bad the midterm red wave would turn out to be. So by his own standards, Obama did pretty well: he did health care and started education reform – all the while stopping our economic free-fall. Other than stimulus investments, however, he never really got around his key energy/environmental reform: cap-and-trade, which passed the House but not the Senate. But two out of three’s not bad. And Obama had to pass these reforms getting little or no assistance from the other side of aisle – yet while making overt political gestures of being open to bipartisanship to keep true to his brand, even if it proved to be unrequited.

The Republican’s politics of obstructionism took its toll. But for the Party of No, the president could have gone even bigger: the public option, separating retail and investment banking, banning derivatives trading, a larger stimulus. And that was when the Democrats controlled both houses of Congress and the White House. Now that the Republicans have taken over the House, and are being watched carefully by their Tea Party erstwhile collaborators, the chances of any compromise on legislation other than the basics (war funding, temporary extension of the Bush tax cuts and the budget, after a fight) in the second half of Obama’s first term are slim to none. I’m betting on a government shut-down by the Spring and Articles of Impeachment by the Fall. Since Obama did almost everything on his first-term agenda in his first two years – some say he was the most legislatively consequential president that we have had since L.B.J. – Obama doesn’t really need to pass anything more before standing for reelection in 2012. Now he has his own Do-Nothing Congress to run against.

Indeed, Obama’s chances of winning reelection may have been sealed when he made a political, instead of purely economic, calculation on the size of the stimulus in his early days in office. The president and his chief of staff, Rahm Emmanuel, decided that they couldn’t sell a stimulus with a “t” in it. When Christina Romer, economic historian of the Great Depression and first Chair of the president’s Council of Economic Advisers, left the Administration and headed back to Berkeley over the summer, she revealed a troubling behind-the-scenes decision-making process. Romer had estimated that the stimulus needed to be $1.2 billion in order to replace the demand sucked out of the economy by the recession and reignite job and economic growth. But the president only considered one under $800 billion. In other words the actual stimulus proposed and then passed was 50% too small to do the job – and was further watered-down with tax cuts to get three Republican votes (one of which, Arlen Specter, was then chased out of the Republican Party). It is now ironic that Obama’s success in his upcoming reelection campaign rests upon a knowingly undersized stimulus.

When Reagan won reelection in 1984, unemployment had come down over the preceding 2 years from 10.8 % to 7.2% — and was headed in a downward trajectory. Morning in America. As John Judis showed in the New Republic (http://www.tnr.com/article/job-one?page=0,2), there is a direct correlation between the employment rate and the president’s favorability rating. In other words, in order for Obama to win a second term, the unemployment rate must drop at least 2 to 3 percentage points below the present level of 9.6% and have the feel of dropping further. If the stimulus doesn’t get us there, bottom line, there will be no second term. If it does, and Obama campaigns on long-term deficit reduction that the Do-Nothings refused to take up, then 4 more years are in order and rightly so.

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