The last week, I’ve been hearing a lot more about the lauded Grand Bargain. This is the Holy Grail of centrists throughout Washington. Basically it would be a law that both cut entitlement spending and raised taxes. Obama even alluded to it at today’s press conference where he said, “And whenever I see John Boehner to this day, I still say, you should have taken the deal that I offered you back then, which would have dealt with our long-term deficit problems, would not have impeded growth as much, would have really boosted confidence.” God, how I hate to hear the president talk that way! It shows that he really doesn’t understand how the economy works.
A Grand Bargain would be terrible for the economy. Since it cuts the amount of money spent on Social Security, people would have less money to spend. That would cause the economy to grow slower than it normally would. Since it raises taxes, people would have less money to spend. That would cause the economy to grow slower than it normally would. See the pattern? There was a time when some economists argued that businesses would be so impressed with the government’s fiscal rectitude that they would decide that the future was bright and so start hiring. The theory was that this “confidence” would be so great as to offset the negative effects of the policy (that is, taking money away from people).
The problem is that those economists have been shown to be completely wrong. Everywhere it has been used, “expansionary austerity” has failed—prolonging recessions and in many cases not even paying down government debt. (If the economy is depressed, there are fewer tax revenues and this effect may be bigger than all the spending cuts.) But okay, I get it: that’s economics and economics is hard and there are always people who say the budget deficit is the only thing holding us back. But what about pure politics?
Obama often argues as though a Grand Bargain would give the Democrats and the Republicans something they both want. But both parts of such a deal are unpopular with both parties. Nobody likes tax increases and nobody likes benefit cuts. I understand that Obama wants to be thought of as the adult in the room—the man who made us eat our broccoli. I think he is under the impression that Clinton has a good reputation because he balanced the budget. That is naive in the extreme. He has a good reputation because the economy was booming while he was president. That’s the same reason Reagan has a good reputation. People will likely remember Obama as an okay president, but nothing great because the economy isn’t great. (Although have you seen Sam Wang’s analysis today: has has the Democrats winning back the House; if that happened, we could get a real recovery going.)
The main thing is that there is no good reason for Obama to be for a Grand Bargain at this time. Economically, it would be a disaster. Politically, it would be a disaster for the Democrats. If one were passed now, it would become law with almost no Republicans voting for it. Then, in 2014, the Republicans would beat up the Democrats with it, “You voted to cut Social Security!” And they would be right, and the Republicans would win. I don’t see why Obama would be eager for such a deal.
A newer form of the Grand Bargain would counter entitlement cuts with a repeal of the Sequester. That would actually be good for the economy in the short term. But this short term benefit would be at the expense of lower benefits for the elderly and higher taxes for the middle class over time. But an argument can at least be made for that.