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Obama’s Dumb Debt Deal

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Obama’s Dumb Debt Deal

President Barack Obama’s commitment to negotiations, compromise, and deal-making is one of his strongest attributes. It is indeed refreshing to have a president who cares more about building consensus and solving problems than thumping his chest and declaring “victories” in all corners of the globe. Obama’s pragmatism has served him very well in the fight against Al Qaeda, which is now on its last legs. Obama’s pragmatism has also created new momentum for cooperation among the biggest states to contain and reduce the proliferation of nuclear, biological, and chemical weapons. On terrorism and weapons of mass destruction, the two overriding threats of the early twenty-first century, Obama has made good deals for the United States.

On the federal budget and the management of America’s ballooning debt, Obama’s deal-making has undermined his purposes and weakened the United States as a whole. The federal debt is now about equal to the nation’s annual Gross Domestic Product and it is rising at a dangerous rate. The nation’s economy is also growing at an anemic pace, in part because businesses are wary of hiring new employees or investing in new capital, and consumers are scared to purchase homes and other large items. The federal debt is a huge problem, and President Obama is wise to work toward some agreement that gets it under control.

For the last 6 months, however, President Obama has confronted the worst intransigence, pig-headedness, and cry-baby behavior from both Republicans and Democrats. Both sides refuse to face the facts that everyone recognizes:

Entitlements are out of control. In 1962 they accounted for 2% of GDP, today they are almost 10%, and they will continue to rise with the retiring baby boomers. The United States spends 1 of every 10 dollars in the economy on people who are no longer contributing to the economy. No wonder our growth is so slow. Democrats refuse to give ground on this issue, for all their talk of accepting budget cuts. Instead, they have prioritized cuts in education and infrastructure, both of which are the surest investments for future growth.

Tax revenue is also terribly distorted. During the second half of the twentieth century the United States benefited from unprecedented economic growth with average annual federal tax revenues of 18.2% of the gross domestic product. Today federal tax revenues are at the their lowest level since the early 1950s: 14.8% of gross domestic product. This is unsustainable at a time when the nation is starved for domestic investment, stymied by crumbling infrastructure (have you visited a major airport lately?), and hemorrhaging money from education (have you visited a major university or a city high school lately?).

Over-taxing smothers innovation, but under-taxing encourages too much personal consumption and too little investment in economic productivity. That is where the United States is today: lots of wealth but lots of unmet capital needs. Our affluent suburbs, for example, have big houses and fancy cars, but chronic problems with roads, schools, Internet access, and the electrical power grid. How else are we going to pay for basic improvements if not through intelligent, moderate taxes?

The debt deal that President Obama accepted on July 31 did not address any of these problems with excessive entitlements or insufficient tax revenue. Quite the contrary, the deal created an intentionally convoluted procedure (with “triggers” “committees,” and “deadlines”) that leaves entitlements and taxes just as they are. The majority of the spending cuts come from an indiscriminate meat-axe to education and infrastructure, with promises of more in the future. Defense spending, at a low historical average of about 5% of gross domestic product (although still too large), will take a disproportionate and indiscriminate cut too.

What a deal!! The nation will radically reduce domestic investments in economic productivity and national security. At the same time, the nation will continue to distribute its treasure to retirees and allow the most wealthy citizens to keep more and give less back. This is a deal for dummies, not a nation on the rise. Would anyone run a business or a household this way?

Sorry, Johnny, we can’t send you to college because Grandma needs fancy surgery and mom and dad refuse to pay the taxes that will finance the public university in our state. Sorry, Johnny, you will now live worse than your grandparents or parents. But don’t worry, we will still include you in our nice family vacations. Isn’t America great?

President Obama deserves high praise for his serious efforts to work between the intransigent “more entitlements” and “no taxes” positions. He really tried. When, however, it became clear in the last week that a serious compromise was not possible, the time had come for a different strategy.

Leadership requires serious efforts at compromise, but also bold moves during moments of stalemate. Although bold moves are risky, they are sometimes necessary. That was the insight of President Franklin Roosevelt in the Depression and the Second World War. President Obama admires Roosevelt, but he did not show similar courage on this issue. Pragmatism is necessary, but not sufficient for strong leadership in a time of crisis. Sometimes, a leader has to carry a country in a new direction.

What should President Obama have done? Last week, when it appeared that real compromise was not possible despite his best efforts, the president should have invoked his powers in the 14th Amendment to protect the full faith and credit of the United States from political extortion. That is, after all, why the provision was added to the 14th Amendment after the Civil War – to prevent partisans in the South and elsewhere from holding federal policy hostage to debt authorizations.

President Obama should have spoken to the American people, foreign viewers, and credit rating agencies with the following sincere and courageous words:

“Ladies and Gentlemen, I have tried for the last 6 months to forge a compromise that will solve our budget problems, problems faced by every major Western nation today. The parties at the table have chosen short-term political gains over the long-term needs of the country. They are unwilling to budge. They are short-sighted. Instead of accepting a compromise that will make matters worse, I have determined that I have no choice but to invoke my constitutional powers to protect the full faith and credit of the United States. I will raise the debt ceiling to maintain our credibility as a free and solvent society, a society that always pays its debts. I will redouble my efforts to address the real problems in our budget. I call on Democrats and Republicans to end their bickering and join me in the real work of reducing our excessive entitlements and raising the necessary revenues to get our country moving. This is the moment when we really prepare for a new era of prosperity. I will not allow partisan intransigence to imperil our country’s future.”

President Obama should have given that speech. His desire for a deal, in this case, undermined his efforts at leadership. For the United States to escape the present economic mess, President Obama must find new courage in coming months. Too much boldness becomes superficial bombast; too much pragmatism becomes self-defeating. The real balance the president needs is to seek negotiation, but also recognize when he has to stand alone.

The opinions expressed in this blog are personal and do not necessarily reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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  1. Ruud van Dijk August 1, 2011

    Well put, although you’re very even-handed in regard to the negotiating parties at the table (don’t the Republicans deserve most of the credit for this sordid spectacle?). So why do you think the White House chose not to go the 14th amendment route? Electoral politics, lack of guts? They must have thought the respective scenarios through …

  2. Arnold Levy August 1, 2011

    Obama and the legislative leaders have engaged in a more sophisticated version of kick the can. You’re right to suggest we’re not making progress in addressing our deficit challenges. We’ve had a bi-partisan debt-driven economy for many years. And the day of reckoning is still getting closer. I agree with your assessment of Obama’s leadership style. Pragmatism has its place but not usually in a time of crisis. I think his instincts contradict an effective negotiating style. That’s who he is and it’s not working in his domestic politics as you differentiate. Regarding the 14th amendment, I agree he likely has the legal right to act. But the legal and political fight he would have ignited would make Roosevelt’s effort to stack the SC look like a minor event. He’d be called a dictator and much more. In the end, he didn’t know how to play that card.

  3. Jeremi Suri August 2, 2011

    Excellent comments, Ruud and Arnold. I agree with Arnold that Obama would have been called a dictator and a tax/spend/debt liberal by Republicans. That is one of the reasons he resisted using his 14th Amendment power to raise the debt ceiling.

    In answer to Ruud’s question, I think the president chose reelection over the national interest. He could have raised the debt ceiling and continued to push for real cuts in entitlements and increased tax revenues. Doing that, however, would have given the Republicans more ammunition to accuse him of increasing our debt. Instead of taking the political heat, Obama acted as a conciliator, betting that in 2012 the American public will want a conciliator, not a firebrand, in the White House. Obama sacrificed the national interest for his electoral future. Everyone acted that way in Congress and the White House. No one showed leadership. Shame on our country! What have we become?

  4. Larry August 3, 2011

    I agree with much of what you say however it does anger me that you seem to imply that Social Security is an entitlement. It might be lumped in that category but I along with my employers have paid for that entitlement for many years. As I move close to retirement it is abit condescending to say I will no longer be contributing to society. I honestly believe that I have and will continue to pass along much wisdom to those who are younger if they are willing to accept it. I may not be talking about government issues but I will be talking about living a quality life with integrity and honesty. Again, I agree with your basic tenets but strongly object to the implications you make about retirees.

  5. Jeremi Suri August 3, 2011

    Larry — I understand your concern and I agree that retirees are definitely very important and valuable parts of our society. They deserve respect and support. They have wisdom and experience we need more of these days.

    My main point is about affordability. The United States has the same problem as the rest of the Western world and Japan. We have a large demographic bulge of aging citizens who will retire faster than they are replaced by new workers. The retirees will also live longer than their predecessors and incur much higher health expenses, especially near the end of their lives. WE CANNOT AFFORD TO PAY ALL OF THOSE BILLS AS A SOCIETY. We must impose some limits. My suggestion is means testing so that the most wealthy retirees get less than the least wealthy.

    A second point about priorities. Obama’s debt deal and recent state budgets impose deep cuts in education, child health programs, and infrastructure. They protect social security, Medicare, and other retirement benefits from substantial cuts at the same time. That does not make sense. I wish we did not need any cuts, but we do. Our future depends on our young, and they are the ones who need the most investment of precious resources. Retirees need protection too, but they should not come before the young.

    A fair balance should at least spread the cuts between the young and old. Why do the old get spared and not the young? Is that wise? Should we protect social security while we savage education spending, as the debt deal requires? We have to make tough choices and assure that we are not starving our future by giving everything to our distinguished (and politically mobilized) retirees.

  6. Larry August 4, 2011

    I understand the need for balanced cuts but retirees do not have many options to adjust to these changes. I do think there are some entitlement programs that are frequently abused. If we could help those who “truly” need assistance we could perhaps reduce the entitlemen expenditures like you and I both desire. If we are to make any significant cuts to social security it must be done so that those who are protected have time to adjust to those changes. My father who passed away recently received just $1100 per month. How do you reduce those kinds of payments and have anyone live any kind of reasonable life? I honestly believe (with no real evidence mind you) that there is enough waste in government to significantly reduce deficits. I vote for those who promise not to raise taxes because it is the only way i can slow them down. Locally schools are based on property taxes and I vote no to any tax levies not so much because I think they are wrong but it seems to be the only way I can say I am paying enough taxes.
    At what levels do you think the tax burden should be increased. I do think that there wealthy people who can pay more. I don’t understand why people who make their money from investments should pay a lower rate than the middle class.

  7. Jeremi Suri August 4, 2011

    Larry – you and I agree on most points. I think many hard working people are taxed very heavily. I also think there is too much misuse of money in government and other sectors of our economy. As a whole, I think we are misusing our capabilities. We are not pushing ourselves as a society to think critically about the wisest and most productive uses of people, money, and natural resources.

    You and I also agree that many people with wealth and political access are not paying their fair share. Many organized groups are also taking more in entitlements than they need. I believe we can solve many of our debt problems if we ask those who can pay more taxes to pay a little more, and if we ask those who can live with fewer entitlements to take slightly less. We need to start making these difficult decisions.

  8. Larry August 10, 2011

    While we seem to agree frequently, I have serious concerns how we will ever get those things done with the current political climate. There seems to no ability to put our country and it’s people first. It is all about it is my way or no way. Also, with current ability of PACS to pour almost unlimited funds into campaigns etc it gives me great pause about being able to make those kind of changes. Everybody is in the frame mind to protect my turf. Take it from everybody else but not me. I also have great skepticism when it comes to almost all politicians whenever they open their mouth. It seems what they say is always spin rather than saying what needs to be said. We have helped create that atmosphere because whenever a candidate says we need to do something that might be a little painful we run from them. Take Scott Walker, whether one agrees with him or not he has taken a stand and people want to remove him and anyone who voted for his programs. I don’t necessarily agree with all his ideas but we don’t want hear we have to give up anything. You are obviously much younger than I so keep pushing new ideas and let’s at least start an open discussion.

    Good luck in Texas! You will miss the winters I am sure!!

  9. Jeremi Suri August 11, 2011

    Larry, I share your concerns. I think your diagnosis about selfishness and big money is on target. I can only hope that the present crisis will shake people out of their stupor. We can only get ahead as a society if we make new efforts at shared sacrifice. I see no alternative. I hope that necessity breeds a change of attitude among many groups in our society, including my own age and professional cohort.

    Thanks for your kind words. We are excited about our new opportunities in Austin, but we will always treasure our connection to Madison. Austin and Madison should jointly lead a revitalization of community and wise public policy. I will try to do my part…

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