by Robert Kuttner
December 7, 2009
It was the best of Obama, it was the worst of Obama.
I was pleasantly surprised to be invited to the White House jobs summit last Thursday, where I got to watch President Obama engage with about 130 people off the cuff. And I was reminded, first hand, what drew so many of us to the promise of this remarkable outsider -- the decency, the intellect, the idealism, and the evidently progressive impulses. I came away even more bewildered and dismayed at the reality that this president, who could have been such an insurgent at a moment demanding insurgency, has been so utterly captured by the Wall Street elite, the health insurance industry elite, and the military elite.
As a friend said, "I so wanted to be supportive of a great progressive president this time instead of being back in opposition."
At the jobs session, Obama began with a ceremonial introduction, then sent the summiteers into six working groups for about two hours. He circulated among them, and concluded with an extended on-the-record plenary session leading a discussion of the jobs challenge. He was absolutely masterful, with a fine grasp of detail, and values that one could only applaud. What a contrast with George W. Bush!
All afternoon, people put forward thoughtful ideas for getting unemployment down. The elephant in the room, however, was the question of whether to increase the deficit, especially with the White House under pressure to back the scheme for a deficit-reduction commission.
So, when my turn came to ask a question, I pressed President Obama on the issue, and he did not disappoint me.
Robert Kuttner: You know, most of the things that have been proposed today cost money. And there is this concern about the federal deficit. I hope that your administration will recognize, as I know you will, that it's possible, first of all, to reduce the deficit over time and sometimes in the short run realize that you need to increase the deficit. I hope the concern about the deficit in the long run doesn't crowd out the need for additional spending in the short run.
And I also think that some of these programs that increase jobs and increase GDP are probably the fastest way to get the economy back on a track that will reduce the deficit over time. It's certainly a better way to reduce the deficit than putting ourselves into a debtor's prison, and assume we can deflate our way to recovery.
President Obama: Well, I think this is an important point. We have been talking a lot about specific initiatives. There is a macroeconomic element to this whole thing, and so let me just amplify what was just said. We have a structural deficit that is real and growing, apart from the financial crisis. We inherited it. We're spending about 23 percent of GDP and we take in 18 percent of GDP, and that gap is growing, because health care costs -- Medicare and Medicaid in particular -- are growing, and we've got to do something about that.
You then layer on top of that the huge loss of tax revenue as a consequence of the financial crisis, and the greater demands for unemployment insurance and so forth. That's another layer. Probably the smallest layer is actually what we did in terms of the Recovery Act. I think there is a misperception out there that somehow the Recovery Act caused these deficits. No. I mean, we had -- we've got a 9-point-something trillion-dollar deficit. Maybe a trillion dollars of it can be attributed to both the Recovery Act as well as the cleanup work that we had to do in terms of the banks.
It turns out, actually, TARP, as wildly unpopular as it has been, has been much cheaper than any of us anticipated. So that's not what's contributing to the deficit. We've got a long-term structural deficit that is primarily being driven by health care costs and our long-term entitlement programs. All right, so that's the base line.
Now, if we can't grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who've got jobs are paying taxes, and businesses that are making profits have taxes, are paying taxes. That's the most important thing we can do. We understand that in this administration. That's not always the dialogue that's going on out there in public, and we're going to have to do a better job of educating the public on that.
The last thing we would want to do in the midst of a -- what is a weak recovery, is us to essentially take more money out of the system either by raising taxes or by drastically slashing spending. And frankly, because state and local governments generally don't have the capacity to engage in deficit spending, some of that obligation falls on the federal government.
Having said that, what is also true is that unless businesses and global capital markets have some sense that we've got a plan, medium and long term, to get the deficit down, it's hard for us to be credible, and that also could be counterproductive.
So we've got about as difficult a economic play as is possible, which is to press the accelerator, in terms of job growth, but then know when to apply the brakes in the out-years, and do that credibly. And we are trying to strike that balance, but we're going to need help from all of you who oftentimes are more credible than politicians in delivering that message, because we want to leverage whatever public dollars are spent, and we are under no illusion that somehow the federal government can spend its way out of this recession. But it is absolutely true that any of the ideas that have been mentioned here are still going to require some public dollars, and those are actually good investments to make right now.
This response was pitch-perfect. Let's see how hard the president fights for more deficit spending to put Americans back to work, and whether his State of the Union Address is as good as this impromptu answer.
It was the same week that Obama decided to buckle to the pressure from his generals on Afghanistan. For several weeks, Gen. Stanley McChrystal has been taking his case for escalation public. You wonder why Obama didn't say to McChrystal, "General, you work for me and I expect your advice to be confidential. If you want to go public, you are free to resign." President Harry Truman, when the war hero Gen. Douglas MacArthur went public with his campaign during the Korean conflict for war with China, simply fired the popular general.
It was also this week that key House Democrats caved in to Goldman Sachs on the issue of derivatives regulation, and Treasury Secretary Tim Geithner backed the industry's efforts to weaken the measure rather than urging Congress to hang tough. Late in the week, Barney Frank, chairman of the House Financial Services Committee, reached agreement with Collin Peterson, the conservative Democrat who chairs the Committee on Agriculture on the key details. In their draft, Wall Street won all of the key points -- big loopholes for derivatives involving foreign exchange, and even bigger ones for derivatives involving non-financial "end users." Bottom line: the industry's lucrative and high-risk practices of creating and trading most derivatives outside regulated exchanges will likely continue.
For the back story, see Michael Hirsh's terrific piece in the current Newsweek,in which he reports:
"This is an orchestrated, well-funded effort by the banks to manipulate our legislation and leave no fingerprints," says a congressional staffer involved in drafting the legislation. The staffer, who would speak only on condition of anonymity, passed on to Newsweek nine pages of proposed changes in the legislation intended to protect trading from open scrutiny -- all of it on paper without a letterhead -- that she says came from Goldman Sachs.
Where was Obama in all of this infighting? The kindest interpretation is that he was distracted by the health insurance bill, and by Afghanistan, and simply letting Geithner run the show.
Many of us in the progressive committee play a little game with ourselves called, "If the Czar only knew ..." We don't want to believe that this attractive leader is fully aware of some of the things being done in his name. If only President Obama knew, he would set things right.
Well, the Czar knows. He certainly knew who he was appointing, even if he lacks the time to parse every provision of a complex bill on financial derivatives.
Time for a pop quiz.
President Obama has turned out to be disappointingly centrist because:
- A. Wall Street has immense power, and you have to be at least as radical as Roosevelt to even partially dislodge it.
- B. As a consummate outsider, he concluded that he needed the blessings and the expertise of the establishment -- the financial establishment, the military establishment, the medical-industrial establishment.
- C. He never really was that much of a progressive on economic issues.
- D. He really believes what he says about building bridges and finding consensus -- which defaults to making accommodations with the powerful.
- E. All of the above.