The big reason to make a deal before January 1, 2013 was that detonating the “austerity bomb” would impose 3.5% of fiscal contraction on the U.S. economy in 2013, and send the U.S. into renewed recession. It was worth making a good-enough deal–sensible long-run revenue increases and tax cuts to close the long-run fiscal gap plus enough short-term fiscal stimulus to make the net fiscal impetus +1.0% of GDP–in order to avoid renewed recession.
But by my back-of-the-envelope count, the deal the Obama administration has agreed to still leaves a net fiscal impetus of -1.75% of GDP to hit the U.S. economy in 2013. That is only 40% of the way back from the “austerity bomb” to where we want to be.
I completely agree with DeLong’s policy recommendation; there is no reason to abandon near-term stimulus in the context of long-run fiscal consolidation. Indeed, I believe that any austerity at this point is foolhardy, and only serves to prolong the exit from the zero-bound.
But DeLong’s recommendation was never on the table to begin with. From day one this has been a debate about the extent of the austerity, not a debate about austerity itself. Does anyone have the sense that President Obama does not fundamentally believe in the pursuit of deficit reduction sooner than later? I keep coming back to this observation from Bruce Bartlett:
In a little-noticed comment on Spanish-language television on December 14, Obama himself confirmed this typology of today’s political spectrum. Said Obama, “The truth of the matter is that my policies are so mainstream that if I had set the same policies that I had back in the 1980s, I would be considered a moderate Republican.”
I think this is correct and explains a great deal about why Obama refuses to use his leverage to pursue liberal policies and keeps inviting Republicans back to the negotiating table again and again on the budget. He wants a deal, he wants to cut spending and balance the budget if possible. This may or may not be a wise course for a Democratic president to follow, but that is who Obama is.
I frequently see commentators saying that Obama is terrible at the bargaining table, but I can’t help thinking that he is getting pretty much what he wanted. Despite all the hate heaped upon him by the right, Obama just isn’t a progressive, and we shouldn’t expect him to seek a deal as if he was one. After all, what progressive ensures a tax hike on the lower and middle classes (the expiration of the payroll tax cut with no offsetting cut elsewhere)? Obama seems to believe the best deal is the one no one likes.
After concluding that the deal isn’t so bad, Krugman takes the forward looking view:
So why the bad taste in progressives’ mouths? It has less to do with where Obama ended up than with how he got there. He kept drawing lines in the sand, then erasing them and retreating to a new position. And his evident desire to have a deal before hitting the essentially innocuous fiscal cliff bodes very badly for the confrontation looming in a few weeks over the debt ceiling.
My guess is that Obama already knows that the outcome of that debate will be one in which he looks like he retreated over time. But I also believe that the place he retreats to will be where he wanted to go in the first place; indeed, I suspect he never believed he would get 100% of the Bush tax cuts reversed in the fiscal cliff negotiations. Note too that, to DeLong’s complaint, the next debate will again be an issue of how much austerity. And expect that Obama will allow the negotiations to drag out to the eleventh hour, thereby forcing both Republicans and Democrats to choke down a meal – some combination of tax hikes and entitlement cuts – they both find distasteful.
This piece is cross-posted from Tim Duy’s Fed Watch with permission.