The biggest loser

Patricio Navia

Buenos Aires Herald, August 2, 2011

 

After the frantic negotiations that avoided a default on the fiscal debt, President Obama and the Republican leadership in Congress are trying to spin the news coverage to come out of the impasse as the political winners. However, the short sightedness of the agreement and the kick-down-the-road nature of the way the two sides dealt with tax increase and spending reduction trade off make it clear that both sides ended up losing. Even worse, the American economy will be the biggest loser, since there was no definitive solution to the mounting debt problem and to the structural fiscal imbalance.

 

The two sides had some good points. Republicans, after many years of spending excesses under the Bush administration, are now deeply committed to reducing spending. Democrats are rightly worried about the negative impact that cutting many social programs will have on the economy.

 

The Republican commitment to fiscal responsibility might be opportunistic and overly dogmatic, but it is breath of fresh air after many years of runaway spending championed by both parties during the Bush years. Many first term Republican congresspersons came to Washington on a single-issue agenda, cutting spending. True, politics requires compromise, but elections are often won by promising not to compromise. After many years of irresponsible fiscal behavior, going cold feet responsible and balancing the budget right away might produce more damage than good. In addition, claiming that you can both cut taxes—by extending the Bush tax cuts beyond its original expiration date—and balance the budget is simply the kind of populist dogma that many Latin American countries know too well from past experiences with leaders who defied basic economic theory and led their countries into recession, stagnation and permanent underdevelopment.

 

Democrats, who failed to raise concerns over excessive spending under the Bush administration, have taken on defending social programs. They have some solid points. Precisely under conditions that, according to economic theory, government spending can stimulate the economy, cutting social programs might throw the economy back into a recession. The argument that the economic stimulus failed and thus a drastic cut on government spending will have no impact on the economy is nonsense. If the problem indeed was that the stimulus was not big enough, as many liberal economists argue, then draconian spending cuts will have dramatic negative consequences on the American economy. However, democrats have failed to come up with a sufficiently credible plan to reduce spending and achieve a balanced budget in the foreseeable future.

 

Republicans are right to be worried about the mounting deficit. Governments must live within their means. The growing costs of some entitlement programs and excessive military spending cannot coexist with a relatively low tax take. If a country wants to spend more, it must collect more. However, when the country has already spent more and it needs to pay up past bills, it makes no sense to demand drastic cuts today to pay for yesterday’s excesses.

 

Logically, a balanced solution would require spending cuts and revenue increases. Sadly, the Republican majority in the House only wants to focus on cuts. That will simply not be sufficient. Moreover, many Republicans and Democrats are opposed to cuts in military spending because their districts will be adversely affected. To oppose those cuts, they make the same argument that liberal economists make to oppose cuts in social programs. Democrats are not much more commendable than Republicans. The electoral groups they claim to represent are not making their voices heard as loudly as the Republican bases in part because those disadvantaged groups perceive that both parties are equally captured by special interests.  Thus, the Democratic Party position is fragile and lacks coherence.

 

President Obama is caught between a rock and a hard place. On the one hand, he needs to show leadership and resolve and, on the other, he must face the reality that he lacks a majority in the House and does not really have a working majority in the Senate—even Democrats are nominally a majority there.  Because his approval numbers are in the low 40s, President Obama has not been able to get public opinion to rally behind him. According to his liberal critics, he has ceded to Republican pressure too much, too early. According to Republicans, he has failed to realize how strongly they feel about reducing the fiscal deficit. Both sides would agree that President Obama has lacked sufficient leadership and has failed to maneuver in an admittedly complicated scenario to get Republicans and Democrats to compromise behind a sensible solution.

 

As a result, the agreement reached upon by the White House and congressional leaders does avert the August 2nd default deadline—and its incalculable negative consequences—but it does advance sufficiently towards finding a sound and sustainable solution to the long term fiscal imbalance problem that America faces. President Obama was unable to bring the fiscal deficit debate to a closure, or at least to an agreement that can put that issue off the table, and thus the fiscal deficit ghost will continue to haunt him until the end of his first term.  That makes the U.S. the biggest loser in this last minute deal between the White House and Congress.