July 24, 2014

President Obama's Fiscal Policy

Even though my job as Policy Director means I spend a fair amount of time sitting at my desk and staring at my computer, I also get to play "in the field" giving chart talks or running budget exercises. Earlier this month, I conducted a "Principles and Priorities" exercise at American University, and had a a wonderful "teaching moment" where I was able to link the hypothetical budget simulation to perhaps the primary fiscal policy debate that will surround President-Elect Obama as his administration sets their priorities.

In the exercise, students divide into groups and act like special congressional committees designated with making budget choices. They pick choices in four areas: domestic discretionary spending, defense and national security spending, taxes and revenues, and entitlements. Groups can either cut programs or increase taxes to reduce the deficit, or spend more on programs they consider important, or cut taxes to increase the deficit. At the beginning of the exercise they are supposed to develop a target goal for the deficit and by the end they add up their choices to see how they did. Because we are an organization that stresses fiscal responsibility, the students tend to think the more they can do to lower the projected $8 trillion deficit over the next ten years, the better.

During the deliberations in this class, there were two groups in particular that seemed really into the exercise--asking questions, taking heated votes, and working up until the last minute. When all of the groups gathered to report their findings, I turned to them first.

One of the groups decided that they were going to raise taxes across-the-board and reduce spending on some specific domestic programs. They wound up cutting the deficit by about $1.7 trillion over 10 years. The next group decided to increase the deficit by about $400 billion over 10-years. Their main reason: they enacted an Obama-like expansion of health insurance, increased education funding and some other domestic spending, and only raised taxes on upper-income individuals. When I pointed out they were the first group I had seen in a while that increased the deficit, they responded that it was important to invest in domestic programs, especially health care reform.

I told the class that this was the exact debate President-Elect Obama will face among his Democratic advisors and constituents. The current economic crisis has hidden much of this tension as Democrats and many Republicans agree that increasing the deficit is necessary in order to work our way out of the immediate economic slowdown. For the Obama administration's plans beyond the immediate crisis the tension is likely to come to the fore as there will be a debate between whether Obama should enact numerous and likely expensive priorities in his progressive agenda without regard for its effect on the budget deficit, or whether he needs to either temper his priorities while deficits are large, or pay for his initiatives with an eye towards getting the budget back on the path toward balance.

This fissure in the Democratic party stems in large part from early debates in the Clinton Administration about whether it should place deficit reduction ahead of priorities like tax cuts and increased domestic spending (the deficit cutters are said to have "won" the argument). I recommend this New York Times Magazine story for a good rundown of this history. The history lesson is part of a larger article about (at the time candidate) Obama's thinking on economic policy. The story has a great web-title that highlights the difficult line Obama will have to walk: "Barack Obama, A Free-Market-Loving, Big Spending, Fiscally Conservative Wealth Redistributionist."

There does seem to be an attempt by those representing the two "sides" to have a dialogue about what they agree on and don't agree on. The NYT Magazine article has some of this, as does a Times Op-Ed last week entitled "No More Economic False Choices," by former Clinton Treasury Secretary Robert Rubin and progressive economist Jared Bernstein which discusses their areas of agreement and disagreement, and their recommendations for an Obama administration.

As I explained the competing views to the students during the budget exercise, I wrapped up by making it clear that as far as The Concord Coalition is concerned, the answers to the numerous fiscal challenges faced by the next president will have to involve both an understanding that spending in ways that increases future economic growth is important, but also that there is no reason for us to not prioritize so that we can increase spending in those areas and reduce spending in areas less helpful to the economy. Increasing revenues also needs to be part of the equation and if done properly, would not unduly harm economic growth. The bottom line is that getting back to long-term fiscal responsibility is essential for a sound economy in the future and for ensuring the younger generations that these students represent have the same economic opportunity that prior generations of Americans have had.

--Josh Gordon