By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Economic Perspectives
For all its talk of the importance of averting a debt default, Barack Obama.is increasingly signaling that major deficit reduction has become more than just a bargaining chip to bring Republicans aboard a debt deal. He actually believes that cutting entitlements and reducing the deficit are laudable goals, which would mark “transformational” moments in his President. Let’s face it: the man is not a progressive in any sense of the word; he’s a Tea Party President through and through.
To be sure, it’s tough to make the case that the Tea Party has anything like a genuinely coherent political platform. They hate entitlements, but one of their leading voices in the Senate, Rand Paul, conspicuously avoided any talk of cutting Medicare during his campaign (unsurprising, given how much of his income as an ophthalmologist involved treating Medicare patients). You have Presidential candidate, Michelle Bachmann, pledging never to raise the debt ceiling, yet proposing to slash the federal corporate income tax and eliminate the capital gains and estate taxes.
But for the most part, all share a visceral dislike of “excessive” government spending, buy into the notion that the federal debt levels are “unsustainable” and that entitlements, really need to be “reformed” (i.e. cut back). In that regard, their aspirations appear to have more in common with the President, than their ostensible GOP allies, one of whom, Senator Mitch McConnell, has proposed giving President Obama the power to raise the debt limit on his own through the end of his first term, but to force Democrats to take a series of votes on the debt limit in the months leading up to the election. This would stave off the threat of defaulting on national obligations, but would force the President to be responsible for all subsequent spending cuts and/or tax increases.
On the surface, this would seem to be a great deal for President Obama. He could in theory simply take up Senator McConnell’s offer, raise the debt ceiling and avoid the self-inflicted insanity of draining $4 trillion of aggregate demand from an economy still reeling from massive underemployment and wasted resources. Or the President could, as we and others have suggested in the past), simply invoke the 14th amendment and refuse to enforce a statute that he believes violates the Constitution.
Professor Scott Fullwiler has suggested an even more creative way around the debt ceiling: Fullwiler notes that Fed is the monopoly supplier of reserve balances, but that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum coins). Future deficit spending by the federal government could thereby continue to be carried out by minting coins and depositing them in the Treasury’s account at the Fed (for more details see here).
Curiously, the President won’t pursue any of these options. Why?
If, for example, the President genuinely believes that the 14th Amendment does not give him the right to ignore the debt ceiling, he has been loath to give any reasoning for this publicly. He is, after all, a constitutional law professor. Much like the single payer option in health, the President refuses to even put it on the table, even as a negotiating posture. Is it caution, or does the President genuinely believe this guff about the deficit?
By the same token, the President might well dismiss Professor Fullwiler’s idea as nothing more than a “gimmick”. But if the alternative is the economic apocalypse regularly described by Treasury Secretary Geithner, then why not deploy this “gimmick” if the alternative is (in the words of Mr Geithner), “catastrophic damage across the American economy and across the global economy”?
As Bill Mitchell has pointed out:
[T]he whole edifice surrounding government spending and bond-issuance is also ‘just an accounting gimmick’. The mainstream make much of what they call the government budget constraint as if it is an a priori financial constraint when in fact it is just an accounting statement of the monetary operations surrounding government spending and taxation and debt-issuance.
There are political gimmicks too that lead to the US government issuing debt to match their net public spending. These just hide the fact that in terms of the intrinsic characteristics of the monetary system the US government is never revenue constrained because it is the monopoly issuer of the currency. Which makes the whole debt ceiling debate a political and accounting gimmick.
The fact is that when a President really wants to spend money, he can resort to all sorts of “gimmicks”. During the Clinton Administration, Treasury Secretary Rubin and Deputy Treasury Secretary Summers did an end-around Congress (which was seeking to prevent the use of government money as support for a bailout of Mexico – or more accurately, a bailout for Wall Street banks which had foolishly lost money investing in Mexico) through the deployment of the little known “Exchange Stabilization Fund”. Until then, the ESF had been an obscure entity, the Treasury’s own honey pot, established by an obscure provision in the Gold Reserve Act of January 31, 1934 for the purpose of stabilizing the exchange value of the dollar. The ESF was certainly not created simply help the President go around the backs of Congress. Yet the President did it and in effect called the GOP’s bluff.
To be sure, one can argue that Mr. Clinton was also serving his patrons on Wall Street, when he performed this action. But whatever the motivations underlying the use of the ESF, it made clear that Bill Clinton wanted to spend government money and got his Administration to find ways around the opposition of Congress. Call it a gimmick, or call it unconstitutional (though, in fact, the constitutionality of the action was in fact never queried). However dubious the action (or questionable the motives underlying it), President Clinton evinced a genuine desire to spend money, rather than have the government “live within its means”, whilst invoking the foolish household analogy so beloved of this President. His motives may have been impure, but his intent was clear.
Likewise with this President, who has apparently fallen in love with the idea of being the biggest deficit hawk in Washington, DC. In fact, last Sunday, the White House chief of staff, William M. Daley, said on “This Week” on ABC that Mr. Obama would continue to push for a major deal to reduce the deficit. “Everyone agrees that a number around $4 trillion is the number that will make a serious dent in our deficit,” Mr. Daley said. “He didn’t come to this town to do little things. He came to do big things.”
“Big things” – like destroying the New Deal and what’s left of The Great Society. Who knew this is what Obama meant when he said he wanted to be a “transformational President” like Ronald Reagan? He actually believes this poisonous nonsense about the US on the verge of becoming “the next Greece”. He fails to understand that if private spending is lagging then public spending has to fill the gap. Otherwise output and employment growth will be sluggish if not negative. To cut into the huge pool of unemployed and underemployed labor, employment growth has to be faster than labor force growth, which means that real GDP growth has to be faster than the sum of labor force and labor productivity growth.
These facts are very simple and indisputable. Cutting public spending “at this time” is the last thing the US government should be doing. Yet this President is pushing for the largest possible cuts that he can on the Federal government debt. He is moving ahead of the GOP on this issue. He is providing “leadership” of the sort which is infuriating his base, but should endear him to the Tea Party. This is “the big thing” for Barack Obama, as opposed to maximizing the potential of his fellow Americans by seeking to eliminate the scourge of unemployment. Instead, his big idea is to become the president who did what George Bush could not: cut Medicare, Medicaid and Social Security. What more could the Tea Party possibly want?