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Why Obama isn’t fighting the budget battle

Robert Reich, professor of public policy | March 14, 2011

In the next week the action moves from Wisconsin to Washington, where the deadline looms for a possible government shutdown over the federal budget. President Obama has to take a more direct and personal role in that budget battle — both for the economy’s sake and for the sake of his reelection. But will he? Don’t count on it.

Worried congressional Democrats say the President needs to use his bully pulpit to counter defections in Democratic ranks, such as the ten Democrats and one allied Independent who on Wednesday voted against a Senate leadership plan to cut $6.2 billion from the federal budget over the rest of fiscal year 2011. They want Obama to grab the initiative and push a plan to eliminate tax breaks for oil companies and for companies that move manufacturing facilities out of the country, and a proposal for a surtax on millionaires.

Most importantly, they’re worried the President’s absence from the debate will result in Republicans winning large budget cuts for the remainder of the fiscal year – large enough to imperil the fragile recovery.

But Obama won’t actively fight the budget battle if the current White House view of how he wins in 2012 continues to prevail.

Shortly after the Democrats’ “shellacking” last November, I phoned a friend in the White House who had served in the Clinton administration. “It’s 1994 all over again,” he said. “Now we move to the center.”

The supposed parallel between 2010 and 1994 is something of an article of faith in the Obama White House. That’s partly because so many of President Barack Obama’s current aides worked for Bill Clinton and vividly recall Clinton’s own shellacking in 1994. It’s also because the Clinton story had a happy ending, at least electorally. The fact that Bill Clinton went on to win re-election is a source of comfort to the current White House as it looks ahead to 2012.

From this, many in the Obama White House have concluded that the president should follow Clinton’s campaign script — distancing himself from congressional Democrats, embracing further deficit reduction, and seeking guidance from big business. If it worked for Clinton, it must work for Obama — or so it’s supposed.

The superficial logic that so often passes for thought in Washington typically sees causation where there’s only correlation. In fact, there’s no reason to believe that Clinton’s lurch rightward at the start of 1995 is what won him re-election the following November. He was re-elected because of the strength of the economic recovery.

By the spring of 1995, the American economy had bounced back, averaging 200,000 new jobs per month. By early 1996, it was roaring — creating 434,000 new jobs in February alone. I remember suggesting to Clinton’s political adviser, Dick Morris, that the president should come up with some new policy ideas for the election. Morris scowled. This election will be about the economy — nothing more, nothing less, he said. Morris knew that voters didn’t care much about policy. They cared about jobs. “The president,” said Morris, “is going to say, ‘You’ve never had it this good, and you ain’t seen nothing yet.’”

The 1991-1992 recession was relatively mild as recessions go. As is typical of most recessions, it had been brought on by the Federal Reserve raising interest rates too high in response to fears of inflation — meaning that a recovery would occur when the Fed reversed course and reduced short-term rates, which then-Chair Alan Greenspan obligingly did.

President Obama won’t be as fortunate. The Great Recession resulted from the bursting of a giant debt bubble. Wall Street’s irresponsible lending and speculating, negligible oversight by federal regulators, and the insatiable desire of Americans to use their homes as ATMs created a toxic mixture that exploded at the end of 2007 and continues to sicken the economy.

The Fed has kept interest rates near zero for more than a year and has opened the spigots of its discount window, without much result. Unemployment continues to hover around 9 percent. Economic growth is pathetic.

While jobs used to follow corporate profits, American corporations now rack up big profits without expanding employment. Their profits are coming mainly from buoyant sales by their foreign operations — especially in China and India — combined with cuts in jobs, wages, and benefits here in the U.S.

The richest 10 percent of Americans, who own about 90 percent of all financial assets, are buying again (sales at Neiman Marcus and Tiffany’s are way up). But most Americans still have little purchasing power. Under a huge load of debt, worried about meeting mortgage payments, and seeing their major asset — their home — continue to drop in value, they’re holding back from the malls.

A strong recovery cannot be sustained by the richest 10 percent. Before the Great Recession, the top 10 percent received about half of total income, but they accounted for only about 40 percent of total spending. Forty percent of spending isn’t enough to convince businesses to invest in new capacity and jobs, which is why corporations are still sitting on $1.4 trillion of cash.

So many jobs have been lost since Obama was elected and so many people have entered the workforce needing jobs that even if job growth were to match the extraordinary pace of the late 1990s, year after year, the unemployment rate wouldn’t fall below 6 percent until 2016. That pace of job growth is unlikely, to say the least.

If Republicans manage to cut federal spending significantly between now and Election Day while state outlays continue to shrink, the certain result is continued high unemployment and anemic growth.

Obama’s challenge in 2012 has nothing to do with Bill Clinton’s in 1996. He must fight the Republican plans to cut the budget deficit this year and next, and explain to the public why he’s doing so. And he must convince Americans that public spending during the next few years is necessary to get the economy moving, reduce the long-term debt as a portion of the total economy, and get jobs back.

Cross-posted from Robert Reich’s blog.

Comments to “Why Obama isn’t fighting the budget battle


    Remember Lee Iacocca, the man who rescued Chrysler Corporation from its death throes? He’s now 82 years old and has a new book, ‘Where Have All The Leaders Gone?’.

    Lee Iacocca Says:
    ‘Am I the only guy in this country who’s fed up with what’s happening? Where the hell is our outrage with this so called president? We should be screaming bloody murder! We’ve got a gang of tax cheating clueless leftists trying to steer our ship of state right over a cliff, we’ve got corporate gangsters stealing us blind, and we can’t even run a ridiculous cash-for-clunkers program without losing $26 billion of the taxpayers’ money, much less build a hybrid car. But instead of getting mad, everyone sits around and nods their heads when the politicians say, ‘trust me, the economy is getting better..’ Better? You’ve got to be kidding. This is America , not the damned ‘Titanic’. I’ll give you a sound bite: ‘Throw all the Democrats out, along with Obama!’


  2. Where is the outrage at the republicans for their deceptive and hypocritical protection of the richest 10% with more and more tax breaks, while supporting cuts that will destroy our nations education system, gut our life saving health care and extinguish any possibility of job creation for the remaining 90%????
    The republicans behavior is unpatrotic, unamercan and treasonist.

  3. Why are about 100,000,000 more intelligent than you R.R.? You cannot tax the rich and make the economy better, there are not enough dollars. You and many Cal faculty are the rich elite. Funny you do not pay more than you have too and are the filthy rich. No wonder you like many in WI are calling on ‘hurting’ walker. The mainstreme media blacks it out but homevids all over the net are showing what killers and thugs these Unions who are in the top majority of wage earners are threatening the poor people.

    FACTS: In which you have NONE!

    “In fact, in 2006, the Census Bureau found only 2.2 million households earning more than $250,000.”

    March 14, 2011 5:00 A.M.

    There Aren’t Enough Millionaires

    Kevin D. Williamson

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