In this excellent piece in today's Washington Post, we find out how the president came to make the predictably disastrous decision to succumb to deficit fever rather than cure unemployment and the housing crisis. And where some of the players came out might surprise you:
In the summer of 2009, Geithner was asked by a television interviewer whether tax hikes would be needed to rein in the nation’s debt. Geithner responded it was too early to tell, an early hint of the priority he put on cutting the deficit.
Political strategists at the White House were mortified. Obama had promised not to raise taxes on the middle class. This had been a centerpiece of his election campaign. At a White House briefing a day after Geithner’s remarks, he was publicly chided by Obama’s top spokesman for engaging in a “hypothetical.”
But Geithner already had the president’s ear. Privately, Obama offered reassurance. “I’d have said the same thing,” Obama told him, according to two people familiar with the conversation.
By early last year, Geithner was beginning to gain the upper hand in a rancorous debate over whether to propose a second economic stimulus program to Congress, beyond the $787 billion package lawmakers had approved in 2009.
Lawrence Summers, then the director of the National Economic Council, and Christina Romer, then the chairwoman of the Council of Economic Advisers, argued that Obama should focus on bringing down the stubbornly high unemployment rate. This was not the time to concentrate on deficits, they said.
Peter Orszag, Obama’s budget director, wanted the president to start proposing ways to bring spending in line with tax revenue.
Although Geithner was not as outspoken, he agreed with Orszag on the need to begin reining in the debt, according to current and former administration officials. Some spoke for this article on the condition of anonymity to discuss internal deliberations.
Even before the president had been inaugurated, Geithner had been urging him to set a target for the budget deficit that would require shrinking its size to 3 percent of the U.S. economy. At that level, the national debt would eventually become manageable.
I'm sure people will say that he had no choice because the presidency is a very weak office that the only power it has (except to wage war unilaterally) is to gently gently beg the congress for permission to adopt its agenda. This, however, is not true. Others will say that there was no point in pursuing further stimulus because the congress wouldn't pass it. But if this account is true, the "pivot" to deficit reduction wasn't a political surrender -- it was a policy choice going back to 2009. And I suspect that's true since the president had been touting his Grand Bargain since before the inauguration, and the whole discussion of "sacrifice" has been implicit since the early days of the administration. That Geithner was worrying about deficits even as the entire global economy was melting down from the financial crisis doesn't really surprise me. (It does send a chill down my spine however -- that's the very definition of disaster capitalism.)
On twitter last week-end Lance Mannion brought to my attention that the inauguration speech itself hit all those themes, (which may explain why it let the air out of the euphoria surrounding the election almost immediately.)
What is required of us now is a new era of responsibility -- a recognition on the part of every American that we have duties to ourselves, our nation and the world; duties that we do not grudgingly accept, but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character than giving our all to a difficult task...
America: In the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children's children that when we were tested we refused to let this journey end, that we did not turn back nor did we falter; and with eyes fixed on the horizon and God's grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations.
I think what surprised me most about this profile is the extent to which Geithner's conservative, bank friendly Wall Street perspective seems to have been seen as politically reliable. I think this gets to the nub of the president's problem:
“Unless you put in a place a long-term fiscal framework, you’re not going to be able to defend a level of entitlement benefits that this president would like to be able to support,” Geithner said.
Sez who? And why would that be so?
The president may instinctively agree with this and feel uncomfortable trying to sell a policy that doesn't feel "responsible" to him. That's his choice. But there is absolutely no law or rule that says that he couldn't have defended entitlements without simultaneously proposing to slash the budget. It's easy to imagine a more populist approach to the bad deeds of the financial community and a focus on housing and unemployment that could have reaped political rewards that this ongoing discussion of future calamity wouldn't. Indeed, from a psychological perspective this constant focus on cutting has very likely impacted demand (by scaring the hell out of people about the future) and deepened the slump.
Seriously, why would anyone think Geithner has any insight in to the politics of all this? He is a conservative Wall Street banker. His view of the world and how it works is confined to how it will impact the elites who control the money. But the president was supposed to have a broader perspective. Merely telling Geithner that they would have to take 12 years instead of 10 to get their favored 4 trillion in deficit reduction doesn't qualify.