The Sorry State of Our Union
President Obama delivers his fifth State of the Union Address on Tuesday. Based on White House leaks, the president will emphasize rebuilding the middle class. He will invoke the importance of education, infrastructure, clean energy, and manufacturing.
These are terrific themes, economically and politically. The only problem is that rebuilding the middle class by the public investments that the society needs is out of the question -- because of the downward drag of a budget politics that the president shares.
The administration is officially committed to the idea that we need another $1.5 trillion in budget cuts over the next decade -- a rate of fiscal contraction half again as large as this year's Sequester, and for 10 full years.
The White House shares with the Republican right and the corporate center-right the assumption that we achieve a full economic recovery by targeting a lower debt ratio by 2023, and that we reduce the debt ratio by cutting the deficit.
As recent events have shown (in case there was any doubt) this sequence is backwards. The debt ratio comes down when the economy recovers. Fiscal contraction slows the recovery, and the loss of public investment denies the government the very tools it needs to use education and infrastructure to help rebuild the middle class.
Last week, the Congressional Budget Office reported that the economy will grow at just 1.4 percent this fiscal year, down from an already feeble 1.9 percent last fiscal year -- because of shrinkages in public spending and a two-point hike in the payroll tax on working people. Were it not for this fiscal contraction, CBO calculated, the economy would have grown at about 3 percent.
In the last quarter of 2012, the economy actually shrank by one tenth of a percent, largely because the Defense Department deferred spending, by 22 percent, in anticipation of the dreaded Sequester -- $110 billion in automatic cuts in a single fiscal year mandated by the 2011 Budget Control Act.
...if Obama is not yet prepared to take on this fight, the rest of us should.
The Administration has been emphasizing the negative impact of the Sequester, and it will undoubtedly get some prominent mention in Obama's State of the Union Address. But the Sequester is the least of it. The president, in the 2011 budget deal, signed off on a decade of budget caps that ratchet down spending by about $1.5 trillion dollars -- a higher rate of budget cuts than the Sequester.
Unless President Obama disavows this deal, and the economic assumptions that lie behind it, there will be no new money to spend on anything -- only cuts. By 2023, domestic discretionary spending will be down to its lowest level since early Eisenhower, just 2.5 percent of GDP.
The president's own FY 13 budget proposes to cut domestic spending by some $24 billion, including $200 million for coastal impact assistance (!), and $359 million for clean drinking water. And this is just the president's opening bid. The Republicans will demand far deeper cuts as their price for avoiding the Sequester.
The president is still trying to position himself on both sides of this issue. In his February 5 briefing, he declared, "We can't just cut our way to prosperity," (Amen!) but then added that he hoped to negotiate a "balanced" deficit reduction package of tax reform, spending cuts, and reforms (read cuts) in Social Security and Medicare.
This is a game that Obama can't win, and shouldn't play. It's time for the president to tell the people who the economics are backwards. He needs to reject the entire premise that reducing the deficit in a weak economy is the way to recovery -- and to put the onus on the Republicans if the Sequester kicks us back into a full-blown recession.
I'd like to hear a State of the Union Address that included these words:
The state of our union is divided. There are some who would like to bring the government to its knees by ratcheting back our ability to spend money on common needs, to the point where the government is so small that it can be drowned in a bathtub, as one of these people so famously said.
I am not going to allow that. Last fall, the economy actually started going back into recession, because the Pentagon, anticipating the automatic cuts of the so-called Sequester, began prudently deferring spending. Then the budget deal that I reluctantly signed on January 2 added to the damage by raising payroll taxes on the middle class.
Last weekend, close to a million people lost power in the northeast because the United States, uniquely among advanced nations, doesn't bury most of its power lines. Last fall, super-storm Sandy cost close to a hundred billion dollars in direct damage. It will take hundreds of billions more to protect our coasts against storm surges that will only worsen in the future. And even more than that to shift our economy to clean renewable energy.
All of these investments will not just make us a more secure and productive economy. They will all produce jobs that pay decent incomes. But these investments will take money. And the budget caps imposed by the 2011 Budget Control Act prevent us from finding that money. The Sequester only intensifies the pain.
The people who think we can cut our way to a recovery or to a secure and decent society have been proven wrong. Today, I am disavowing that budget deal and the economic assumptions behind it. You don't get a recovery by targeting a debt ratio a decade into the future. You get a recovery by investing, and when a recovery comes the debt ratio takes care of itself.
When we faced the terrorist threat of al-Qaeda after the attacks of 9-11, we found the money -- over three trillion dollars, some of it in gratuitous wars -- that we felt we needed to keep our country secure. Now we need to find the money to make our economy, and our working families secure.
If those who believe in austerity economics want to obstruct, and inflict deeper pain on working Americans who are now in their fifth year of suffering, history will judge them harshly. I will spend my second term fighting for working Americans and fighting for the ability of government to do its job.
Well, one can dream. But if Obama is not yet prepared to take on this fight, the rest of us should.
If the price for averting the Sequester is another, slightly less onerous set of public spending cuts, the economy will remain stuck in second gear, government will be denied the resources the country needs, and Obama's embrace of the middle class will be nothing but pretty words.
The president is less of a deficit hawk today than he was when he appointed the Bowles Simpson Commission in 2010 and when he signed off on the Budget Control Act of 2011. He's more of a partisan fighter. Let's hope the learning curve continues.
© 2013 Robert Kuttner