Deficits and the Midterms
Edward Luce of the FT writes that Barack Obama should pay more attention to the long-term structural deficit:
A plausible alternative scenario is that Mr Obama will head into next year’s midterm congressional elections, which will help determine his re-election chances in 2012, facing a sullen electorate that fears the Democrats are taking their country towards bankruptcy. It might not be fair – Mr Bush, rather than Mr Obama, deserves most of the blame for America’s deepening structural deficits. But it is the kind of message that could help bring a moribund Republican party back to life.
If this strikes me as somewhat politically naive. For one thing, there’s no reason to think that the midterms “will help determine” Obama’s re-election chances. Note the divergent outcomes in 1994 and 1996, or in 1982 and 1984. If anything, it’s arguably easier for a president to play off an opposition-dominated congress. Meanwhile, the basic geography of the 2010 Senate midterms is very favorable to the Democrats, with open GOP-help seats in New Hampshire, Missouri, and Ohio.
Last, I think there’s just common sense. With the common bad and getting worse and long-term deficit projections looking grim, sure voters say they’re upset about the deficit. But if by the fall of 2010 unemployment is lower than it is today and heading downward, how worried are people really going to be? By contrast, if things keep getting worse, how impressed will they be by an improvement in the projected state of things in 2024? Something’s going to have to be done in the 2011-2014 period to make this graph look different but doing climate and health (which is related) in 2009-10 looks substantively and politically justifiable to me.
39 Responses to “Deficits and the Midterms”
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June 27th, 2009 at 4:04 pm
I remember how the electorate reacted in horror to the Bush administration’s squandering of the 2 trillion dollar surplus. Surely Luce does too – the overwhelming majority of Dems that were elected, the closing up of Bush’s foreign policy initiatives, and of course the election of Kerry in 2004.
On the other hand, none of that might have happened because the only people who give a rat’s ass are Luce’s bondholder friends.
2010 will give us a test of the Republican program – let things get much worse, and revive the American economy the old fashioned way – by cutting labor costs to third world proportions. Thus, we can keep the rich rich, and we can shrink the average median household income by ten thousand to twenty thousand dollars. This oughta be a winner! But at least the lucky ducky middle class will be morally invigorated by lack of horrid, government controlled healthcare.
June 27th, 2009 at 4:09 pm
I find nothing in the FT article’s thesis implausible.
The median voter is hard-pressed to distinguish between a current-account deficit and an economic downturn, when in fact one could have the first, and not the second, the second and not the first, neither, or both. (I leave aside the eternal inability of the median voter to distinguish between the national debt and a current-account deficit.)
He’s been trained to think of the country’s finances as identical to his finances, and of running a country as identical to running a small business.
A lot depends on what campaign ads the median voter looks at twelve months from now, and what elite opinion tells him to think.
Why the median voter is encouraged to conflate the deficit with the downturn, and to whose benefit it redounds that the median voter thinks of the government as a lemonade stand, is perhaps worthy of some consideration.
June 27th, 2009 at 5:07 pm
Umm, we’re six months into the guy’s presidency and we’re talking about whether he can be reelected? Does the guy even get a chance to govern before we evaluate him? I’m thinking that we may be getting a little ahead of ourselves. If this keeps going, we’ll be talking about future presidential candidates that haven’t graduated high school yet. But if you want to go there, there’s a kid on my street who’s a lock for 2044.
June 27th, 2009 at 5:09 pm
I find nothing about the article’s concept remotely plausible, and any chance that the public might blame a slow recovery on Obama is being quashed by the buffoonry of his opposition.
The Federal government has run budget deficits most years since the Crash of 1929, and the deficit has never been a major issue save among a certain subculture of business types. This subculture, once they got the run of the country after 1994, led us into fiscal and economic disaster and helped destroy the credibility of the Republican party and the national media who have supported their corrupt practices so loyally for fifteen years.
If there was anyone left of the conservative establishment with any skill or marketable integrity, they could conceivably find some way to sell the issue to the public. However, Eisenhower and Reagan are dead, Cronkite is retired, and all that’s left is the clown show led by Boehner, Gingrich, Fox News, and Rush Limbaugh.
Obama is a skilled politician, shows signs of being a first -rate executive, and he is blessed with an opposition led by bunglers, blowhards, egotists, and fornicators.
The only issue that could blow up in his face–almost literally–is Afghanistan. The only weakness on his team is a handlful of spineless, corrupt Democratic senators who still worship at the altars of monetarism and fear the ghost of Reagan will smite them if they support their own party too much.
June 27th, 2009 at 5:20 pm
Hi Davis,
“He’s been trained to think of the country’s finances as identical to his finances, and of running a country as identical to running a small business.”
Exactly! This is one reason why small business owners are so right wing – they think that the govt should be at all times in balance or surplus. This is not even true and horribly detrimental to the country..
As long as this relationship holds:
Private Sector Surplus = Public Sector Deficit + Current Account Surplus
(which by definition, it must) we will require deficit spending if we want net savings of U.S. dollars in the world somewhere. Because as you know, the current account surplus is offset exactly by the capital account deficit.
That right-wing economists have obscured this for 50 years or so makes it all the worse.
June 27th, 2009 at 5:23 pm
The median voter is hard-pressed to distinguish between a current-account deficit and an economic downturn
I disagree. The median voter is pretty good at figuring out what an economic downturn is; they check whether they’ve lost their job, or whether their friends have lost their jobs, or whether the stores downtown have all closed. That’s what drives their votes, not the current-account deficit.
June 27th, 2009 at 5:32 pm
Matt Weiner sums it up perfectly.
June 27th, 2009 at 5:34 pm
It appears that it’s making less and less difference who is elected; they pursue the same policies.
Will the next SCOTUS judge be pro-corporate Hispanic woman or pro-corporate European man? Well, excuse me for not giving a shit.
June 27th, 2009 at 5:35 pm
If there was anyone left of the conservative establishment with any skill or marketable integrity, they could conceivably find some way to sell the issue to the public. However, Eisenhower and Reagan are dead
Reagan could sell the issue? That’s unlikely, given how public debt doubled under his presidency – much like his heir W.
Remember that Clinton managed to get surpluses; the disregard for deficits only occured during Bush-Cheney, conveniently in time to lower taxes on the rich even more.
June 27th, 2009 at 5:44 pm
That’s what drives their votes, not the current-account deficit.
If what Matt said was the case, there wouldn’t be a persistent market for the notion that the way to solve the one (economic downturn) is to do the other (eliminate the deficit).
The deficit is not #1, but it’s on the charts, with a bullet.
And someone’s putting it there.
June 27th, 2009 at 5:57 pm
A similar set of conditions didn’t save Roosevelt in ‘38 from a 70-seat loss.
I don’t see a similar-sized swing, but I’d take all the action I can get on a reduced Democratic majority in both Houses after the 2010 mid-terms.
June 27th, 2009 at 5:59 pm
Funny question: “Which comes closer to your own view? The federal government should spend money to stimulate the national economy, even if it means increasing the budget deficit. OR, The federal government should NOT spend money to stimulate the national economy and should instead focus on reducing the budget deficit.”
Somehow, the correct question – which would be, should not spend money, even if it means prolonging the recession – just, someohow, oh somehow, didn’t get put into the poll! Amazing! It is as if the predatory political class wants to frame the issue a certain way. But that can’t be so! Honest souls all, and median income people too, mostly in the 300 -400 thou a year range – plain folks! Like Dick Gregory.
June 27th, 2009 at 6:16 pm
“Reagan could sell the issue? That’s unlikely, given how public debt doubled under his presidency”
Of course he could sell it to you. He doubled the debt and everyone still thinks he was a fiscal conservative. He could sell air conditioning in Antarctica. That’s the beauty of salesmanship, it has no positive relationship to reality at all. In fact, it’s directly opposed to it. If you actually wanted the product, you wouldn’t need a salesman, would you? You’d just buy it. The salesman is there to convince you that your perception of reality is wrong. You don’t want the product, and that’s why you need it.
June 27th, 2009 at 6:20 pm
A similar set of conditions didn’t save Roosevelt in ‘38 from a 70-seat loss.
Huh, I don’t think Roosevelt is a cautionary tale when it comes to presidential unpopularity.
June 27th, 2009 at 6:21 pm
2 trillion dollar surplus. Projected surplus, there ware 2 years of on budget surplus the largest when people dumped NASDAQ stocks causing individual payments to increase. That same year spending increased $77 billion.
Clinton managed to get surpluses
He had 2 on budget surpluses, the first almost insignificant and the 2nd as noted. Off budget excess cash flow resulted in 4 years of surplus 1998-2001. The total was about $600 billion with off-budget surplus of $530 billion.
That was a good thing. Al Gore wouldn’t have given that all away. Oh, and we wouldn’t be in Iraq so many thanks to your confreres there, Matt.
(YGLESIAS (6/2/08): It’s hard for me to tell how much of the sleazy behavior that Purdum hints at here is actually true. Based on the record, it wouldn’t at all be unlike Clinton for some of it to be true.)
Tim Russert’s work is “unbearably inane,” but it betrays no partisan animus.
Ah, yup.
June 27th, 2009 at 6:23 pm
Surely “David Gregory” not “Dick Gregory”….
June 27th, 2009 at 6:29 pm
I’ll add this about salesmanship. I have a friend who sells cars, and when I was looking for a new one, I thought I’d ask him what cars were good. He got angry and said “why the hell are you asking me? I don’t know shit about cars.” And so I asked him why he sold them and he explained that there was good money in it. Then I asked how he could sell cars without knowing anything about them. And he said: “You don’t know shit about sales, do you? My job is to make people feel happy about spending money. It has nothing to do with the product. I’d sell you air if it made you feel good.”
June 27th, 2009 at 6:33 pm
“A similar set of conditions didn’t save Roosevelt in ‘38 from a 70-seat loss. ”
Yes it did, because Democrats won so many seats in ‘32, ‘34, and ‘36, they still maintained very large majorities in both houses after the losses of ‘38.
June 27th, 2009 at 6:42 pm
Obama’s got less wiggle-room if he wants a governing majority in Congress then. Less still if he splits his own party over secrecy and accountability issues. It’s easy to envision a radical Righto-Leftist coalition in the Senate that can’t pass anything, but block everything.
June 27th, 2009 at 7:09 pm
A similar set of conditions didn’t save Roosevelt in ‘38 from a 70-seat loss.
So check back with us about the 2014 mid-term election. As the man noted, the Dems won big in 1934 and 1936.
I don’t see a similar-sized swing, but I’d take all the action I can get on a reduced Democratic majority in both Houses after the 2010 mid-terms.
Don’t bet your paycheck. The Republicans are still crashing hard and the professionals were giving odds against them before they they started the current, non-Dick Cheney string of series screw-ups, scandals, and laughable talking points.
It’s easy to envision a radical Righto-Leftist coalition in the Senate that can’t pass anything, but block everything.
Envision for us, then. How about some names of the Leftist Democratics who might attempt to shut down the senate? The senate Democrats who are obstructing things right now are corporate conservatives trying to save the world for their CEO golfing buddies.
June 27th, 2009 at 7:45 pm
Voters talk about how worried they are about the deficit, but rarely act on it. Reagan and Bush were never really punished for it. Clinton and Congressional Republicans weren’t rewarded for it. It’s a bit like the Environment was in the ’90s- it polls great, but no one votes on it.
Even in the 1938 example cited above doesn’t really show deficit fears driving an election. The two biggest factors in 1938 were the 1937 Recession and the fact that Democrats had had four wave elections in a row. Indeed, FDR had started tackling the deficit in 1936 and 1937 (which some thing LEAD to that recession), and had trimmed the deficit some.
And 2010 is going to be a lousy test case, too; the Senate map is just too tilted toward Democrats. Any change in power is going to be negligible, with a dozen other factors contributing.
June 27th, 2009 at 7:58 pm
But if by the fall of 2010 unemployment is lower than it is today and heading downward, how worried are people really going to be?
I suspect there’s a fair chance the economy could actually be booming by November of 2012. But by November of 2010? No way. So, even if things are bottoming out right now, and the economy begins to grow again later this year, unemployment probably won’t peak until next spring. Seems to me very unlikely the unemployment rate will actually be lower by mid terms than it is now. Still, if that election is preceded by twelve months of gradually improving economic headlines, and people are getting more confident, the Democrats ought to be able to hold their own, and keep both houses of Congress (although Obama should be prepared for a modestly reduced margin in the House).
Anyway, few people allow concerns about government debt to play much of a role in their vote, I’d wager. High information voters who do so will mostly go the way of the Democrats, and low information voters who do so are mostly GOP dead-enders whose votes aren’t up for grabs. And remember, it’s not as if there’s no intellectually respectable case to be made in favor of large-scale government borrowing in times like these. So the Democrats need not take GOP scare-mongering and demagoguing about this issue lying down.
June 27th, 2009 at 8:33 pm
Davis, I don’t think the polls about deficits vs. stimulation tell us much about how people vote when the chips come down. There’s been a lot of study of voting behavior in relation to the economy. It shows that people are more likely to vote for the incumbent party when the economy is growing; I’m pretty sure that it doesn’t show any connection to the deficit. That’s because, no matter what they say about the deficit, in November they can look around and see how they and their friends are doing. That’s what drives the vote.
As for Roosevelt’s losses in 1938, at the time the U.S. had just suffered the 1937-8 recession, brought on by a premature attempt to cut the deficit. So this supports the opposite of Luce’s thesis.
Also, if I were a betting men I’d take you up on that “Democrats lose seats in both houses” thing. The electoral map in the Senate sucks for the GOP.
June 27th, 2009 at 8:41 pm
Ah, Colby beat me to both the 1937-8 recession and the electoral map. And, huh, everything else I said.
June 27th, 2009 at 9:01 pm
Both political parties tend to change their character when they are in power. Fiscal responsibility seems like a great idea when you have no capacity to control how money gets spent or who tax cuts go to. Republicans will talk about hte deficit until they get into power and cutting taxes matter more to them. Of course progressives are more restrained I think because it is easier to expand government if you can assure people that there is some limit to how far you will go.
June 27th, 2009 at 9:25 pm
Oh, pish. The usual suspects are wailing as if deficits were a danger because there is talk of giving taxpayers something besides bombs for their money. It would be nice if some Democrats or better economists would get some air time and put Reaganomics to death. The whole supply-side worldview should be hanging its head in shame now, but noooooooo. An even bigger deficit may be a very good thing, but a large part of the population has been convinced that it’s always a failing.
I hate the MSM.
June 27th, 2009 at 9:27 pm
And I have to wonder if they’re talking about President Obama’s chances in the next election, six months into his first term, because it’s so hard for them seeing a black Democrat in office. Liberal media my ass. If CAP isn’t giving money to news shows like Heritage and CATO does, perhaps it should start. Appears you have to pay to play.
June 27th, 2009 at 10:53 pm
I agree with the blog post; Obama inherited great structural deficits, and I admire him for tackling longer-term issues like health care and climate change, even though I don’t agree with all the specifics. Still, I slightly disagree with the blog post, in that I think it would ALSO be great if Obama gave us something real, in regard to the deficit. For example, he could raise the social security retirement age by 6 months, to take effect in 2 years. This is an example of a change that seems to me to be modest and reasonable. Unfortunately, if Obama doesn’t give us something substantive on the deficit, the blog’s “worst case” may come to pass; frankly it’s not such a long shot that voters (including me) will become darned uneasy about the hugeness of the projected deficits, and we may feel that a little bipartisan (i.e. Republicans) counterbalancing is not a bad idea.
June 28th, 2009 at 12:13 am
As others are implying, the greatest known threat to Obama’s reelection chances is the possibility of a double-dip recession, and by a very wide margin–if anything, that is the lesson of the 1938 (and 1982) midterms. Moreover, a double-dip recession would have more affect on the deficit in the short term than anything Obama could conceivably do or not do. So it would be politically idiotic for Obama to prioritize reducing the deficit in any notable way over dealing with the general economy. For that matter, I would place meaningful health care as a much higher priority as well (if nothing else for the opportunity cost).
That said, I’m fairly confident that in 2012, the deficit will be a campaign issue of some sort. So by that point, Obama will definitely need a deficit-reduction plan to offer, and it wouldn’t hurt to have something in his record to point to. Again, though, assuming we don’t get a double-dip recession, it is extremely likely Obama will have “cut the deficit” relative to this year, even if he does nothing in particular to that end.
Finally, I wouldn’t assume the 2012 Republican candidate is going to naturally own this issue regardless of what Obama says or does. The bottomline is that the deficit record of the last three Republican Presidents is just abysmal, and it won’t be hard for Obama to point that out.
June 28th, 2009 at 12:44 am
It is not the Republicans but the primary battles that will determine the result. By the time primaries roll around the inflationary problems will begin to surface. ACES will not be the charmer that Yglesias thinks it is. We will probably be embroiled in a dogfight over health care. New taxes will be on the horizon. The Fed, Obama, and Congress will all be at odds about when to yank interest rates up. And the grand theft of Government Sacks will be high on the smear agenda. In that environment, the Bond vigilantes will be up in arms. There will be brutal primary battles as he center wing of the Dems attempt to regain control.
Dems may likely keep control, but not the same Dems, the balance budgeting Dems.
June 28th, 2009 at 1:04 am
This is one reason why small business owners are so right wing – they think that the govt should be at all times in balance or surplus. This is not even true and horribly detrimental to the country..
Given that most businesses are started by taking out a very large loan and paying the interest on the loan with the revenues generated by the business sales, I find this difficult to believe.
Nobody competent running a business would respond to a downtown by firing the sales staff and cutting down on advertising.
Then again, we are talking about right-wing businessmen.
June 28th, 2009 at 8:15 am
Tyro,
I didn’t say they were logical, I just said they believe this. However, SB owners do tend to think in terms of receivables vs. what they owe.
Ask any SBO of them and they will know the ratio. This is the thought process they tend to use when thinking about the govt.
Then, most people here including Matt Y. are following right-wing economists even when they are liberals. If the economists were correct, that would be one thing, but these economists are factually wrong.
If running deficits eventually raised interest rates, Japans long term rates would be among the highest in the world. Their debt to GDP ratio is the highest among the G7 by a lot. But of course, they have extremely low rates and have had these low rates for a longer than a decade now. In other words, the economic theory that says structural deficits will create inflation is either extremely slow moving, extremely weak in action, or is wrong.
June 28th, 2009 at 9:02 am
In other words, the economic theory that says structural deficits will create inflation is either extremely slow moving, extremely weak in action, or is wrong.
Well, Japan has never had much of an up cycle in the relevant period, so arguably the theory hasn’t gotten much of a test in their case.
But I think that point applies to the U.S.: we are unlikely to see significant inflation again until the general economy is in much better shape. At which point I do think it will likely make sense to try to reduce the structural deficit, but that point is very much not now.
June 28th, 2009 at 10:09 am
Matt Weiner (#23), I can’t agree with you.
A much larger factor in the downturn of 1937 was the fact that in the mid-30s, wages increased dramatically due to government regulation and union pressures, causing businesses to be unable to afford to hire more workers.
In fact, a great deal of the problems that kept the Great Depression going so long came from Hoover and Roosevelt’s attempts to prop up wages during a downturn, their theory being that consumption drove the economy and that higher wages increased consumption. What they did not realize is that production drives the economy, and that higher wages can only come about as the result of increased productivity.
June 28th, 2009 at 11:00 am
Glaivester, you should read the prominent historian of the Great Depression whose blog I linked. I can tell you that talking about “[keeping] the Great Depression going so long” is seriously misleading; GDP was rocketing upwards under Roosevelt until the 1937-8 recession, so it’d be odd if there were some continuous policy that was “keeping the Great Depression going” under both himself and Hoover. The main reason the Great Depression lasted so long is that Hoover had put the country in such an enormous hole that it took a long time to climb out.
Just in case, everything Amity Shlaes writes is horseshit and should be consigned to the flames. Again, see the blog I linked.
June 28th, 2009 at 5:23 pm
There is a guaranteed way out of our current economic depression. We need a very major war. Maybe if North Korea hits Hawaii with a nuclear ICBM we can once again, like in 1941, become a united people bent on the complete destruction and of an alien race.
June 28th, 2009 at 9:32 pm
The mainstream media keeps telling us that the November vote was a mandate for all the things Obama is pushing (higher spending, socialized medicine, cap & trade, etc.), but they’re wrong. The November vote was because people disliked Bush, and they bought the whole “hope and change” message. But mark my words – in the end, a majority of Americans will reject his policies, when they they realize what they will do to our nation and its economy.
June 28th, 2009 at 11:23 pm
Just in case, everything Amity Shlaes writes is horseshit and should be consigned to the flames. Again, see the blog I linked.
Amity Shlaes is a Council on Foreign Relations bitch. I have read some of The Forgotten Man and am angered (but not surprised) at how much shemisleads about the Federal Reserve policy under Hoover (she says that the tiughtfistedness of the Fed helped to keep the Depression going, when in reality the Fed was pursuing very loose monetary policy from 1929 to 1931 and the monetary contraction occurred from factors beyond its control).
The books I read for Depression-related economics are Meltdown by Thomas Woods, The Politically Incorrect History of the Great Depression by Robert Murphy, and America’s Great Depression by Murray Rothbard.
I can tell you that talking about “[keeping] the Great Depression going so long” is seriously misleading; GDP was rocketing upwards under Roosevelt until the 1937-8 recession, so it’d be odd if there were some continuous policy that was “keeping the Great Depression going” under both himself and Hoover. The main reason the Great Depression lasted so long is that Hoover had put the country in such an enormous hole that it took a long time to climb out.
The policy of keeping wages high regardless of productivity led to the extension of the Depression under Hoover, and created the enormous hole that made recovery so difficult. So this policy is one of the reasons that the Depression lasted so long, even if you do not lay any blame on Roosevelt.
The Depression should have been over in late 1930 or early 1931. It lasted as long as it did and became so severe largely because Hoover browbeat companies to keep wages up when they could not afford it. From December 1930 to March 1933 real wages (i.e. purchasing power was 105.3 to 111 percent what it was June of 1929. This helped those who had jobs, but caused massive unemployment.
Moreover, the fact that there was some recovery during the mid-1930s does not necessarily let Roosevelt off the hook, as wage policies of his that were similar to Hoover’s are largely to blame for the 1937-1938 recession that hampered the recovery and thus extended the length of the Depression.
While GDP started rising again under Roosevelt (partly because companies were finally letting wages fall, partly because some of Roosevelt’s inflationary policies had the effect of lowering wages, partly because the economy was hitting a point where so much malinvestment had been liquidated that the situation almost had to get better, he still pursued policies toward increasing government intervention and regulating wages.
While these policies did not prevent the recovery of the mid-1930s, I believe that they slowed the recovery, and more importantly, they led directly to the recession of 1937-38.
Partly due to the National Labor Relations Act of 1935, money wages went up 13.7 percent in the first three quarters of 1937 without a concurrent increase in productivity. This was in large part responsible for the recession of 1937-1938, as businesses became unable to afford labor costs.
June 29th, 2009 at 10:41 am
About 1/3 of the electorate is Liberal and will support whatever Obama does; they’ll vote for him regardless. About 1/3 are on the opposite side and will vote against Obama. That leaves the 1/3 who are true swing voters and are the ones that REALLY put Obama in office. They’re not radicals; they voted for Obama primarily because:
1. A rejection of all things Bush/Neocon; it was NOT an endorsement of the Left’s agenda.
2. Bush screwed up the economy…they voted for the other side to fix it!!!
3. Health care. Everyone understands we can’t continue “as is” and that some change is needed.
IMO Obama is at risk with these people because he’s not sufficiently focused on the eonomy…which is the one thing that people really do vote on. I think the swing voters are also appalled at not only the huge number of initiatives Obama is taking on…but the feeling that ALL of these initiatives come with HUGE price tags that they (the voters) will eventually have to pay for. Obama is doing to damned much, too fast, and IMO he’s going to get an unpleasant surprise in 2010.