CAP’s rethinking of the grand bargain path is good. Now CAP should rethink their role in putting us on that path.
The Center for American Progress (CAP) has issued an important new report saying that “new realities” dictate that we “reset button on the entire fiscal debate,” end the pursuit of a fiscal “grand bargain” with Republicans in Congress on deficit reduction, and replace the sequester (through 2016). One can only hope this signals a change in direction for the administration and others on the center-left who embarked on the grand bargain deficit reduction journey in late 2009 and early 2010 when their focus should have remained on job creation. That turn of events was one of the most consequential economic policymaking decisions in decades, because it derailed job creation (i.e., further stimulus) efforts thus ensuring that recovery from the Great Recession would be agonizingly slow. That, of course, has had a hugely adverse impact on the wages, benefits and employment of the vast majority of Americans, but has also had tremendous political fallout (i.e. 2010) and weakened the public’s faith in government’s ability to spur job growth. It was a clear unforced error by CAP and the administration to suggest the need for a grand bargain on deficit reduction, embodied in the appointment of the Simpson-Bowles commission. For these reasons it’s worth examining the argument CAP has made and compare it to the situation in late 2009 and early 2010 when CAP pushed for a grand bargain, praised the Simpson-Bowles effort and recommended a deficit plan that, if adopted, would have started to cut spending in October 2010 (when, it turns out, unemployment was still 9.5 percent). This is not an across-the-board indictment of CAP—they do lots of excellent work, including Michael Linden’s budget analyses. But it is important to highlight that there were two paths available to liberal and center-left policymakers over the course of this crisis, and many of today’s difficulties are with us because the wrong path was chosen. EPI, I am proud to say, was and remains resolutely focused on the ongoing jobs crisis.
These paths started clearly diverging on September 30th, 2009. EPI sponsored a forum, “Generating a Robust Recovery,” on the need to undertake further action to generate jobs. Princeton’s Paul Krugman, Berkeley’s Brad DeLong and EPI’s John Irons were featured in a panel, and Geoff Garin of Hart Research released a poll showing that most people hadn’t felt the impact of the stimulus and thought economic policy was oriented to the well-off (many people confused TARP with the stimulus). On that same day the Center for American Progress and the Center on Budget and Policy Priorities held a conference, Progressives and the National Debt, “designed to lay the intellectual groundwork for efforts that the administration and Congress should undertake—once the economy has fully recovered—to put the nation on a more sustainable fiscal path.” I have never really understood why my friends on the center-left decided that September 2009 was an important moment (unemployment at 9.8 percent) to highlight the need for long-term deficit reduction. CAP’s president, John Podesta, summarized the conference, “[We need to] build toward some decision making that could take place as we come out of the deep recession because a response that is based on the unpredictable and the unexpected event often hurts the people who I think we, [as progressives], care about the most—the people most vulnerable.” CAP, apparently, had been listening to the Wall Streeters who were telling them, as they told the administration, that interest rates can “turn on a dime” so we need to undertake a deficit reduction plan. We knew this was wrong.
The December 2009 CAP report, “A Path to Balance: A Strategy for Realigning the Federal Budget” elaborated the reasons further, which I would describe as “full confidence fairy”:
“It’s time to show the world that the U.S. government has a path to reducing its budget deficits. Current projections show that annual deficits will be running at above 4 percent of gross domestic product and be on the rise even once the nation is well clear of the Great Recession. That’s too high. The mere prospect of large sustained deficits poses risks to financial markets, endangers the rest of the economy, and undermines U.S. standing in the world….
We shouldn’t leap to a balanced budget, but neither can we do nothing. Without a defined path that has credible stepping stones along the way, the markets and the world will wonder at our intentions, worry about purchasing the debt we’re selling, question investments in the United States, and act with excessive caution in fear of higher interest rates. Balancing the budget right now could slam the brakes on economic recovery, but not embracing a way forward could slow our recovery as well, and in the worst case, provoke a crisis of confidence that scuttles the progress we have made.”[Emphasis added]
The report called for “primary balance” in FY2014, a balanced budget in FY2020 and, astonishingly, “a path for annual deficit improvement, starting in fiscal year 2011, with specific yearly targets.” The plan, proposed in late 2009, when unemployment was 9.9 percent, called for deficit reduction starting on October 1, 2010, when unemployment turned out to be 9.5 percent! This was clearly a bad idea.
So, what has changed CAP’s mind? They claim that reality has changed, so policy approaches must change as well. This is admittedly an effective argument for moving people committed to a grand bargain to a new and better place. The new reality they identify is:
- The intellectual argument in favor of austerity collapsed in a somewhat spectacular fashion.
- The implementation of austerity in Europe has been nothing short of disastrous. Unemployment in the Eurozone is at a record high and the UK’s austerity almost resulted in triple-dip recession and has actually resulted in more, not less debt.
- Health care spending has grown much more slowly than expected, due in part to Obamacare.
- We have already enacted significant deficit reduction: $2.5 TRILLION worth, three-quarters of which has come from spending cuts.
I truly hope these arguments persuade people to “reset”: abandon the pursuit of the grand bargain and replace the sequester through 2016, as CAP recommends. I’d like it even better if we just canceled the sequester without any replacement deficit reduction. But it would have been best if we had never set a path that we now need to jump off; there’s nothing on CAP’s list that wasn’t knowable in late 2009. Health care reform was underway under the mantra “bend the cost curve,” so what other action was needed at that moment? We already knew that austerity was contractionary, didn’t we? We knew the entirety of the Bush tax cuts were expiring soon1, which gave the Administration huge leverage in restoring progressive taxes to raise significant revenue (leverage they didn’t use to near large-enough effect, granted). And getting the Republicans to agree to cut all that spending wasn’t all that hard to do, was it? The result has been at least a one-third cut in domestic spending over the next ten years, including public investment. The sequester just adds insult to injury.
Paul Krugman finds all of this annoying as well. He describes Wonkblog’s affirmation of the CAP report as an “uncharacteristically dyspeptic post this morning lamenting the failure of essentially anyone in DC to change policy proposals despite all the information that has come in undermining whatever intellectual basis those proposals might once have had.”
CAP is certainly correct that we have been going down the wrong path and should jump off it. But those of us that argued against taking this path in the first place deserve our due.
I am glad that CAP is seeing the light now and is encouraging a focus on jobs and not on deficit reduction, but it’s not easy to undo the damage done early in the Obama administration, when CAP’s leadership could have been useful.
1. They ended up expiring a little later than we thought, but for generally good reason (the Obama administration was trying to preserve some fiscal stimulus at the end of 2010 and offered a delay in their expiration to get it).