Who really won the U.S. debt debate?

The Republicans don’t have as much to celebrate as everyone thinks

I followed the debate over the debt ceiling in the U.S. from Europe, where the commentators were perplexed about why the U.S. government would risk a default for the sake of purely partisan politics. With the deal done and a possible catastrophe is averted, the discussion has shifted to who won and who lost.

Conservatives like columnist Charles Krauthammer have supported raising the debt ceiling all along while acknowledging the work done by Republican negotiators. Others, such as Utah Senator Mike Lee, a leading Tea Party activist, and most GOP presidential hopefuls, opposed it. Respected liberal economist Paul Krugman wrote in the New York Times that President Obama had surrendered. So, who actually won? Was there a winner?

Clearly, this was a manufactured crisis, as raising the debt ceiling has never stirred so much down-to-the-wire confrontation in the past. President Reagan raised it 18 times and he is the darling of the Republican right to this day.

The end result of the negotiations is more debt and cuts that are undefined and gradual. Spending cuts will take place in two sequences (now and within 6 months) and are meant to span the next decade. Both defense and entitlement program cuts are on the table, as well as tax reform. A bipartisan congressional committee will handle the second series of cuts. If the committee is unable to put together a package of cuts that would pass Congress, their disagreement would trigger across-the-board spending cuts.

To many observers, the Tea Party faction of the Republican Party has won the day. The liberal media has lent credence to this view by lambasting Obama and accusing him of capitulation. Even conservative columnist Ross Douthat writes of a “diminished” president. The early assessments may still be a bit premature.

What did the Republicans gain, exactly? They got spending cuts equivalent to the rise in the debt limit. They also got Obama to buy into the debt/deficit discussion. But this is not new ground for Obama. He had already acknowledged the unsustainability of prolonged debt and deficits. The December 2010 deal with a freshly emboldened GOP reflected that view. So I guess, the Republicans win the P.R. war. But on the substance—if not on the means—both parties agree.

The Republicans wanted no new taxes. Yet, tax reform is part of the mandate of the bipartisan congressional committee. Both sides—liberal and conservative—acknowledge that tax reform will result in new tax revenues. Obama has also kept his right to veto the Bush tax cuts when they expire in 2012.

The debt ceiling debate was a convenient tool for more militant Republicans to attack the size and role of government. Entitlement reform is often seen as the vehicle for this. Yet, this deal in the first sequence protects the parameters of entitlement programs, and adds the possibility of defense cuts (a Republican concern, and a Democratic intent) to the mix. If the size and role of government is to change, it will not be solely the way the GOP wants them to. Obama has kept all options open down the road as the deal unfolds.

What did Obama want? He needed to raise the debt ceiling to prevent default and a sure recession. He had to have a credible plan to avoid a downgrade of the U.S. triple A rating. He wanted the cuts to be gradual to avoid stalling the recovery any further and wanted to protect key entitlement programs. He did not want to lose his veto on the Bush tax cuts in 2012 and he did not. Finally, he wanted to avoid a repeat of this summer’s debt ceiling battle prior to the 2012 election. While the credit rating remains a concern, Obama got much of what he felt was necessary.

So, who really won? It is too early to render a definitive verdict. The Republicans did not do as well as the Tea Party hoped. But Obama did not do as badly as his liberal critics would indicate. The result in the 2012 presidential elections will give us the real answer.




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Who really won the U.S. debt debate?

  1. Obama won, as he usually does.

    The credit rating will likely still be downgraded though.  The tea party makes the US unreliable.

    • In the interest of full disclosure, I’m with the tea party (you become a member by showing up, or just planning to show up sometime .. it’s sort of informal). My guess is most think Obama won. It could be explained by saying “I’ll gladly pay you Tuesday for a hamburger today”.  Obama got what he wanted for a promise not due for ten years. To the tea party, the issue wasn’t the debt ceiling anyhow (as the author correctly notes), it is solvency. Missing a payment is bad, but never being able to pay it all back is worse. That’s what the ratings agencies will look at IMHO. Clever politicians will eventually inflate our way out, to the detriment of seniors and the working lower class. Just sayin’.

      My guess is Canada will enjoy a cash inflow from the US as capital seeks a friendlier home. Hopefully that will spare Canada some of the suffering you endure when we screw up (the operative word is “some”). That said, sound financial management currently appears to be a Canadian trait. That and generally non-insane political leadership, regardless of party.

      • Ahh…so instead of chucking perfectly good tea in the harbour,  you take tea at 4, with cucumber sandwiches and scones and so on.  Good show!

        Our ‘sound financial management’ is due to the Scottish part of our inheritance…but it has some nasty Calvinistic side effects

        At the moment that means the Calvinists are in power….with none of the financial ability unfortunately.

      • Sound financial management . . . at least in comparison to the U.S.  Whatever one (ie, me) may say about Harper, he actually passed his university all by himselfsies without a bucketful of tutors and a heap of bribes.

        I never thought of the Scottish element before, but it’s pretty astute.  Speaking of Scottish inheritance . . .  Adam Smith was part of the “Scottish Enlightenment”, was he not?   I’ve always thought Canadian economics was far more representative of Smith as a whole and not the “Smorgasboard Smith” of the American right, particularly the part about “invisible hand” being Smith’s terminology for superstitious beliefs.

  2. “But Obama did not do as badly as his liberal critics would indicate.”

    Pols just did their regular thing – delayed making a decision and appointed commission to look into cuts when they know perfectly well what generally needs to be reduced. 

    I agree that Tea Party types did not win much over the weekend and will not be pleased but I think that was also disastrous weekend for Obama. Left wing are snobs and Harvard educated President Obama just got rolled by a bunch of hobbits. 

    Think of how enthusiastic and idealistic Dems/Americans were a few years ago - We Are the Ones We’ve Been Waiting For – and will they feel same passion next year?  I bet Tea Party types will be full of energy and enthusiasm next year, can Obama rely on same energy from Dem base?

  3. “Respected liberal economist Paul Krugman wrote in the New York Times that President Obama had surrendered.”

    Dem base will believe Krugman – because it will reinforce their beliefs – but good luck President Obama. 

    Krugman has completely lost his mind and is on some kind of mission to prove Reagan era was terrible for economy in order to prove that Krugman and his keynesian ideas aren’t emtirely wrong and making economic recovery more difficult.  

    A few days ago, Krugman tried to prove Reagan era was not as good as advertised and to prove it, Krugman started Reagan era in 1973. Who knew Reagan was president in ’73? 

    Corrosion of Conservative Economic Mind:

    “….. there seems be an epidemic of politically conservative economists who used to be technically competent repeating the obviously wrong falsehood that Reagan ushered in an era of “unprecedented” growth.”

    http://krugman.blogs.nytimes.com/2011/07/30/the-corrosion-of-the-conservative-economic-mind/?smid=tw-NytimesKrugman&seid=auto

    “What strikes me about Paul’s blog post, however, is how completely unconvincing it is.  He uses a chart that starts the Reagan era in 1979, arguing we need to correct for the business cycle.  But would or should this persuade anyone?”

    http://gregmankiw.blogspot.com/2011/06/preaching-to-choir.html

    • I agree that Krugman’s chart isn’t a great illustration. Instead, from the comments, here’s growth rates from the Glorious Years of Reagan:

      1981:-0.5
      1982:-3.6
      1983:3.7
      1984:2.4
      1985:0.6
      1986:1.4
      1987:0.1
      1988:1.0

      Average Growth: 0.63
      Average Growth(1983-1988): 1.53

      I think Krugman’s point is solid: Reagan didn’t usher in a period of unprecedented growth, especially compared to 1.9% between 1948 and 1973. Do you disagree?

      “completely lost his mind” seems a bit overstated, don’t you think?

      • I think it is crazy how people associate President and economy because Congress makes laws, not President. Presidents can make economy worse by signing bad legislation into law but can’t manipulate it like public think President’s can. 

        No magical formula to create jobs, low interest rates, increasing house prices … mostly luck.Reagan did usher in era of prosperity, just depends when era is measured.

        Since 1980 – 2010 there has been a remarkable expansion of wealth and services for everyone. Reagan set conditions by tax reforms and deregulation but no one person should get credit/blame for economy. 

        Jane Galt 2004:

        I saw some Republican on television yesterday — I think it was Grover Norquist, saying that Reagan was great because when he took office, unemployment was 10% and interest rates were sky-high, and when he left office everything was boom-a-riffic. This is every bit as fine a bit of data mining as Democrats who make similar claims for Clinton — the economy sucked when he took office, and was booming when he left.

        When Clinton took office, the economy was already recovering from a recession; when he left, it was sliding into another one. That’s luck, not talent. (Rubinomics buffs, peace out. I’ll deal with you later.) Similarly, high unemployment and interest rates under Reagan were not because Democrats Had Been Driving the Economy Into the Ground Until the Grownups Took Over.

        High inflation was the result of a dozen years of bad fiscal and monetary policy under two Republicans — Nixon and Ford — and two Democrats — Johnson and Carter — that was brought under control only when Paul Volcker, the Carter-appointed head of the Federal Reserve, jammed interest rates up to national-heart-attack levels and left them there until inflationary expectations were well and truly tamed. 

        Reagan had nothing to do with unemployment and interest rates falling; that was the invevitable result of a drastic monetary tightening finally working its way through the economy.

        http://www.janegalt.net/blog/archives/004766.html

        • I tend to agree – a President’s influence over the economy is much more limited than people seem to believe. Which is why the Reagan hagiography is so irritating. There’s an actual, organized effort by Republicans (led by Norquist) to turn the man into some sort of saint (http://www.salon.com/books/excerpt/2009/02/02/ronald_reagan)

          It seems to bug Krugman too, which is why he would point out that Reagan’s achievements were far from unprecedented.

          Strange that you would write: “Krugman has completely lost his mind and is on some kind of mission to prove Reagan era was terrible for economy…” when that’s not true at all.

          Interesting, the one recent example of a President directly affecting the economy is through damage. George W. Bush escaped just as things started to collapse, and Obama’s Presidency has been defined by grappling with the result of Bush’s appalling record. Here’s a powerful illustration: http://www.washingtonpost.com/blogs/ezra-klein/post/obamas-and-bushs-effect-on-the-deficit-in-one-graph/2011/07/25/gIQAELOrYI_blog.html?fb_ref=NetworkNews&fb_source=other_multiline

          But then it’s always easier to destroy than to build, just ask the “Tea Party” Republicans.

          • I sort of differ with the view that presidents don’t matter for the economy. If growth were simply a function of economic forces (technology, labor and capital), we would have income convergence globally, because there are diminishing returns to scale for many of the inputs into growth.

            Institutions do matter for growth, and it is policymakers that craft them. However, institutional choices matter a great deal more for long-term growth than they do for short-term growth. In that sense you are right – it is hard to evaluate a presidency based on their direct economic record. 

            In the short term, it is probably the federal reserve chairman that deserves the lion’s share of the credit/blame (although the end of the Great Depression may represent short term improvements stemming from presidential policy*). Certainly that is the case for Reagan’s (really Volcker’s) biggest accomplishment – the war on inflation (which has stayed low since). 

            I do think it is fair to say that Reagan’s policies aided the tech boom of the 90′s. Financial deregulation made it easier for capital to flow to small risky enterprises. At the same time he also deserves part of the blame for the credit crisis. Reagan (like Carter, Clinton and Bush) adopted policies that probably enabled higher long-term growth, while also increasing the risks of a systemic economic collapse.

            *And I think abandoning the gold standard was more important than the New Deal. 

  4. Un autre exemple qui montre l’importance de RP soutenues pour tenter de changer la perception de l’opinion. Les RP sont en cohérence avec  l’importance des enjeux politiques en l’occurrence… La virulence des stratégies employées est en adéquation avec l’intérêt des objectifs… Ces enjeux ont-ils été moins graves ou considérés comme tels lorsque sous Reagan le plafond de la Dette a été relevé 18 fois ?
    Obama devra s’attendre à un regain d’énergie de la part du Tea Party.

    • I don’t think the Tea Party is doing a lot of favours for the Republicans long-term, because they really piss off the Democrat base & alienate moderate Republicans.

      How this plays out will probably depend on how many people find or lose jobs over the next year or two.  Regardless of which part of gov’t is most responsible, change in employment levels is apparently one of the best indicators of re-election for presidential encumbents.

      I’m nor sure how relevant the Scalia-dominated Supreme Court is to discussion on finances.  It is the third branch of government that can influence laws (Executive, Legislative and Judicial), and for the last couple of years it’s been making decisions that rule against the small/medium business level of the economy, where growth tends to come from, in favour of big business, which has been somewhat less than stagnant in terms of job creation in recent decades.

  5. Not sure anyone won, but the American people lost. Clearly, this was more about showing who was better at a political game of “Chicken” than about any real attempt at a solution.

    What the US needs now is a grass-roots, non-partisan “toss all incumbents” movement.

    • Like the Tea Party?

      • Absolutely NOT!!! The Tea Party is the antithesis of “non-partisan”. I mean simply saying to the incumbents, retire or be voted out. If they care about their party they’ll step aside, as failure to do so assures the other party gets the seat. No voting on party lines if the incumbent runs; vote simply to replace.

        There can be no clearer message that “same old, same old” won’t work than to set out to replace every member of the old guard regardless of party.

  6. >Obama has also kept his right to veto the Bush tax cuts when they expire
    in 2012.

    Do you mean he kept his right to veto an _extension_ of the cuts (ie. to cut taxes)?

    It wasn’t necessary to raise the debt ceiling to avoid default: all that was necessary was to give interest and refinanced debt priority.  Conversely, failure to send a strong enough deficit control signal may result in ratings downgrade regardless.

    If revenues sag a little more, or expenses increase a little more, and ratings downgrade occurs de jure or de facto (“bond vigilantes”), the debt ceiling reckoning might slip back on this side of the 2012 elections.  Won’t that be entertaining?

    We’ll know in the next few months whether Obama did badly or not.

  7. Sure, Obama has rhetorically addressed the implications of the debt, but I think its pretty clear this is an issue he would rather deal with after the 2012 election (indeed, a big cause of delay was disagreement over whether the next debt ceiling debate would have before or after the elections). Does the deal leave things open for tax increases later? Yes, but remember that both spending cuts and tax hikes have a depressive effect on the economy (in the short-run). Spending cuts today may well make Obama and the Democrats less inclined to raise taxes tomorrow. What is more, if you look at the size of the majority in favour of the deal, Obama probably had more negotiating space.

    Yet I don’t think this was much of a policy victory for the GOP. The cuts they obtained are mostly in the future – and may not be honoured by future presidents (or it is possible a president supporting the cuts would be elected anyway). What is more, the US is still at serious risk of a credit downgrade, which would add 100 billion/year to the deficit. Not only would it eat up a third of the planned cuts, many of the cuts in the deal are things that would probably have happened anyway. Government spending as a % of GDP remains significantly above the postwar average.

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