Weekly Standard Online
March 26, 2011
by Irwin Stelzer
The president and his team have one goal – reelection. Nothing ignoble about that. They know their chances of achieving that goal depend heavily on getting the unemployment rate to turn down, sharply and soon, leaving enough time for the feel-good factor to take hold before November 2012. Nothing ignoble about that, either. And they have to persuade voters that the president is focused on that one goal to the exclusion of all else, that he will not be diverted as he was when he moved Obamacare to the top of his agenda last year. And that's where Robbie Burns's warning about what can happen to the best laid plans of mice and men comes in.
The president planned to bill his first-ever tour of South America – a four day, three country (Brazil Chile, El Salvador) affair – as a job-creation event, fulfilling his pledge to create two million export-based jobs. Never mind whether that goal is realistic, the point is that everything the president does, every act, every trip, is designed to convey one message: he cares about jobs. Press, take note.
So the White House team was delighted when Obama persuaded Brazil's new president, Dilma Rousseff, to support America by toughening her call to China to end its currency manipulation, and allow its undervalued currency to rise. Better still, she announced that she will re-open bidding for a multi-billion dollar jet fighter contract, thought until now to be locked up by Airbus and lusted after by Boeing, a big employer in many states, especially in the president's home state of Illinois. It is guessed that, in return, Obama promised to support Brazil's drive to obtain a permanent seat on the U.N. Security Council.
To the chagrin of President Obama's spin doctors, news of those diplomatic victories, with their promise of jobs, was buried by events. With Obama dragged reluctantly into enforcing a no-fly zone over Libya, Japan's nuclear plants on the verge of melt-down, the dictators in America's Middle East allies falling like ten pins, or struggling to control "the street," reporters were not interested in this or that job creating trade deal. They wanted to know how the president defined the mission in Libya, whether he would halt subsidies to new nuclear plants, and what the administration's position is in riot-torn Middle Eastern countries. Norm Ornstein, the oft-quoted political pundit who makes his home at Washington's American Enterprise Institute, told the press that events around the world "makes it very tough for a president who tries to use a foreign trip to help frame an agenda…" Indeed.
The president's difficulties in positioning himself as the champion of a jobs renaissance were compounded by two new reports on the nation's fiscal condition, one by the Congressional Budget Office (CBO), and another by the General Accountability Office (GAO). The CBO analyzed the president's proposed budget for the next fiscal year and estimates that the federal deficit over the next decade will clock in at $9.5 trillion, a mere $2.3 trillion higher than the White House estimate. And the GAO, re-assessing the nation's long-term outlook, concludes that the fiscal situation has deteriorated. If the nation's debt is to be stabilized at 62 percent of GDP, an immediate tax increase of 15 percent, or a spending cut of 13 percent, or some combination of the two is needed. The Peter G. Peterson Foundation, a sort of budget watchdog and nag, concludes that even under a set of optimistic assumptions, "Large and persistent deficits still lead to an unsustainable growth in debt … and a steady growth in net interest payments to service this growing debt." By 2030, unless the president and the Congress come to grips with the fiscal situation, net interest payments and entitlements (pensions, health care costs) will consume almost the entire budget, leaving nothing for spending on defense, education and other programs.
Herb Stein, a wise economist who is no longer with us, once said that if something cannot go on forever, it will stop – his version of the old Wall Street saw that no tree grows to the sky. The question being debated in America is not whether the deficit will grow forever, or to the sky, but what will stop it. John Lipsky, first managing director of the International Monetary Fund, says that unless the politicians devise a credible plan to rein in the debt, the markets will make continued borrowing infeasible. What Lipsky calls the "fiscal crisis" will occur when the so-called bond vigilantes become so skeptical of America's ability to repay its debt without first debasing its currency that they demand ever-higher interest rates. Until now, borrowing costs have been low, in part because the Federal Reserve Board has been buying up Treasury bonds. Sooner or later that will stop, and unless there is a dramatic change in policy, interest rates will soar, consuming ever-larger portions of the federal budget. Think Portugal, with a government in crisis because of voters' apparent unwillingness to adopt an austerity program, or Greece, unable to collect taxes, or Ireland, so heavily indebted that the markets have said "no more." Greece and Ireland have already accepted bail-outs from their eurozone allies, and Portugal is next in line. America is somewhat better placed: having our own currency, we can always simply print dollars to repay debts. That has a price: higher interest rates that hardly contribute to job creation.
Even more worrying than the GAO and CCO reports are the increasing number of studies that show that as a nation's debt-to-GDP ratio crowds 90 percent – a level the U.S. will reach in about a decade – growth slows. That, for Obama, is a problem to be faced, if at all, after he is safely back in the White House in 2012. Meanwhile, he wants to spend more on infrastructure, green initiatives, high speed rail and the like – call it Stimulus 3. In his version of Admiral Farragut's Civil War order to damn the torpedoes, full speed ahead, the president would damn the deficit and continue spending at full speed.
It is, of course, possible that Obama will decide that his reelection prospects will be enhanced by brokering a deficit-reduction deal between his party's spend-more left and the Republican tax-less right, that voters want jobs but not at the expense of their children and grandchildren's living standards. In which case Republicans might decide not to give him such a gift. Spring may have sprung in Washington, but electoral politics remain a cold, hard business.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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