No need to do a careful analysis of the budget President Obama dropped on the desks of the Congress last week – a few broad brushstrokes paint the picture. Debt triples from 2008 levels by 2021; debt as a percent of GDP goes from 41 percent to 77 percent. Not a word about how to reform Medicare, Medicaid and other entitlements that the country can no longer afford. Not a word endorsing the specific recommendations of his own deficit-reduction commission, which called for a $4 trillion deficit cut over ten years, quadruple that contained in the president’s budget. A few inconsequential slices in one small part of the budget, a call for “investment” in green energy projects – never mind that several of the firms receiving subsidies have gone broke – and in high-speed rail – never mind that the governors of the states slated to receive the funds are turning them down lest their taxpayers get stuck with huge cost overruns.
In the end, the president delivered more spending, more taxes, and deficits as far ahead as the eye can see. But the financial and currency markets were unperturbed. For several good reasons.
The first is that the budget was dead on arrival at the House of Representatives, now controlled by a Republican Party newly energized by Tea Partiers who want no part of the red-ink party the president wants to keep rolling. To their credit, they feel no obligation to deny that President George W. Bush set the country on the path to fiscal ruin with a drug-entitlement program that is unaffordable, and therefore have shed the need to defend a lot of pretty indefensible Republican laws. Nor do they feel a need to play ball with their own leadership, drawn from the more traditional, go-along-to-get-along wing of the Republican Party. Indeed, with the help of liberal Democrats, the newly minted Republican congressmen killed an expensive defense project in a district abutting that of the speaker of the House. Now, he must follow them because he is their leader, to borrow (only perhaps) from Alexandre Auguste Ledru-Rollin and (in a variant) from Benjamin Disraeli.
The second reason that investors seemed unperturbed by the Obama budget, labeled “a scandal” by Pulitzer Prize-winning Washington Post columnist Charles Krauthammer, is that the president himself, described by the Obama-supporting New York Times as “on the defensive,” refuses to defend it with any conviction. Instead, he is now representing his budget as merely an invitation to Republicans to come and sit down with him to negotiate a bipartisan solution to the deficit problem “over the next several months…. Nobody is more mindful than me (sic) that entitlements are going to be a key part of this [deficit-reduction] issue….” This discussion, says Mitch McConnell, leader of the minority Republicans in the Senate, “doesn’t have to be in public” – so much for open government – and with luck could result in a mixture of spending cuts and tax increases, with Republicans opting for something along the lines of the plan adopted by Britain’s chancellor of the Exchequer, George Osborne – $3 in spending cuts for every $1 in tax increases – and the Democrats pressing for a solution more heavily dependent on tax rises.
The third reason for calm in the face of a possible downgrading of U.S. sovereign debt, or of a growth-stifling rise in interest rates imposed by the bond vigilantes, is that the political winds are blowing in favor of change. True, teachers in Wisconsin are protesting budget cuts that would require them to pay 12.6 percent of their own health care costs, but Democratic governors from New York (Andrew Cuomo) to California (Jerry Brown) are taking an axe to spending, and New Jersey’s Republican governor Chris Christie retains his popularity despite his swinging cuts in state spending. New York senator Charles Schumer, a member of his party’s liberal wing, sums it up: “The feeling to do genuine deficit reduction is greater on both sides of the aisle than I have ever seen it.” If support for general deficit reduction can be translated into a lack of opposition to specific cuts, we will once again have proved that Winston Churchill was a shrewd observer of the American character: “Americans can always be counted on to do the right thing -- after they have exhausted all other possibilities.”
Perhaps the most important factor that prevented the Obama budget from throwing the nation into a tizzy is the state of the economy. The Federal Reserve Board’s monetary policy committee has upgraded its growth forecast for this year to 3.4-3.9 percent, from the 3-3.6 percent range it predicted in November. The higher range takes account of rising exports, increased consumer spending, and the payroll tax cut. In addition, retailers now say they are expecting sales to increase by 4 percent this year; factory output is rising; executives meeting in Florida at the end of last week were upbeat about the prospects for their businesses, with some saying they would be adding to staff; and the housing market is showing signs that it might, only might, be preparing to move out of the intensive care unit.
The Mortgage Bankers Association says that the number of households behind on their mortgage payments by one payment due-date is now at its lowest level since the recession began, and that loans that are more than 90 days overdue dropped from their record high of 5 percent at the end of the first quarter of last year to 3.6 percent by year-end. Still, with foreclosures at record levels, and prices still declining in most areas, the housing market is a long way from rude good health.
None of this means that the Obama budget will be without consequence. With Democrats in control of the White House and the Senate, Republican deficit-cutters in the House are not in a very strong bargaining position, and won’t get all the spending cuts they are demanding. Despite its cheerier outlook, the Fed plans to continue printing money, at least until the recovery proves more durable and the unemployment rate is reliably headed lower.
Meanwhile, commodity prices are soaring, food prices are following, apparel prices are up in response to rising cotton prices, and all manner of businesses are talking about the need to increase prices. Only price stability in the service sector is holding down the overall inflation indicators. That is not enough to dampen fears of inflation, and it is to those fears that America, a large portion of its debt held by foreigners, is exposed. Interest payments in the 2011 fiscal year already equal the entire budget deficit in 2006, according to analysts at the Royal Bank of Scotland. Should interest rates demanded on U.S. debt rise sharply, as well they might with inflation rising, the Chinese selling U.S. Treasuries, and the Fed due to end its bond-buying program at the end of June, our politicians will have tired fingers from pointing at one another as the cause of the economic ills that will befall us. Unless, of course, they at long last do the right thing.