Debt-ceiling debate: How will Obama and Democrats justify the spending cuts in the deal?

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Aug. 1 2011 11:18 AM

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How will President Obama and his party justify the spending cuts in the debt deal?

Senate Budget Committee Chairman Kent Conrad. Click image to expand.
Kent Conrad speaks about the debt deal

On Sunday, after he'd been schooled by leaders on the automatic cuts that could make a debt deal possible, Senate Budget Committee Chairman Kent Conrad, D-N.D., talked to reporters. He was tight-lipped on the details but broadly optimistic about the bargain. There was one nagging question I wanted to ask: All the discretionary spending cuts in the plan—did they threaten to slow down growth, to drive up unemployment?

David Weigel David Weigel

David Weigel is a reporter for Bloomberg Politics

"Sure they do," he answered. "Now, what we don't know is: What will the offset be of improved certainty and confidence? And we'll just have to see."

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I asked some version of that question to a number of key Democratic senators. They didn't enjoy answering it. The deal that many of them have already reluctantly agreed to support is worse than they would have allowed themselves to imagine just a couple of months ago. Republicans got most of what they wanted. Democrats got … an increase in the debt ceiling, an ugly but rote admission of blown-out spending, the sort of thing that Congress usually passes without incident. "Nothing's 'usual' about this," Conrad said.

The Democrats lost this debate, but that's not a surprise. The perception that the stimulus bill failed has given Republicans a slashing comeback for every spending plan: You guys tried it, it didn't work, let us try the opposite. Backed into a corner, Democratic senators and a Democratic president have agreed to discretionary spending cuts that they think will slow down economic growth.

It's not just Democrats who think this. As the latest, least-doomed version of the deal was hammered out, the New York Times' Binyamin Applebaum and Catherine Rampell were interviewing economists about the effects of looming cuts. "When you do fiscal adjustment in the near term," said IMF economist Paulo Mauro, "it does have an adverse impact on economic growth." An analyst at the Peterson Institute for International Economics, the Vatican of debt angst-mongering, sighed at the silliness of forcing cuts through now, in a weak economy, when they would have been better timed during a boom. Why? Because spending cuts drive down growth in the short-term with the promise of growth in the long term.

Republicans dispute this. When they took charge in the House, they labeled their agenda "cut and grow." The buzz phrase lacked one thing: evidence. Stimulus money has dried up. New Republican governors have lived the gospel of budget cuts. Coincidentally enough, GDP growth is way down from expectations for the year so far. Job creation is weak; back in March, Moody's Analytics and Goldman Sachs predicted that spending cuts could have that effect. The Commerce Department points to the spending cuts as the culprit.

Democrats agree, but they have to sign on to this plan anyway. This leaves them sounding like Pythagoreans thinking deep about the movement of the planets when they explain how the spending cuts/explosive job-growth formula works.

"If you get economic growth for some period of time, you'll see job creation," said Sen. Ben Nelson, D-Neb. "Probably the best kind of jobs bill you can have is one that gives you long-term certainty."

Sen. Jeanne Shaheen, D-N.H., a freshman who's not up for re-election until 2014, spoke in darker tones about the effects of cuts. "Obviously, anything that reduces support for states and local governments or business will have some impact," she said. But she echoed other Democrats. The cuts are the cuts. Accentuate the positive: The impact of avoiding downgrade or default (there's still some hemming and hawing from the rating agencies to get through, but this looks to be true) and getting a debt limit hike that'll last through 2012.

Does that mitigate the damage that they think this will do to the economy? A debt limit hike was what Democrats—and everyone else—expected at the start of the process. Getting it doesn't stop Republicans from invoking the "Confidence Fairy," because they argue that regulations and tax policy are the real causes of employer and investor befuddlement. It doesn't prevent a new kind of uncertainty. What will the "supercommittee" propose? Who loses out if the committee's recommendations aren't picked up, and an automatic "trigger" package of deep cuts goes into effect instead?

"There's certainty in different elements of the plan," said Conrad. "The critical certainty to accomplish here is that the United States is not going to default, and we're not going to be going through this circus in six months. That outweighs, in most people's minds, worries about the uncertainty of how the savings in the second round will be achieved."

Fair enough. The debt limit will be raised. If you buy the polls, Republicans have taken a little bit of damage over the impression that they were willing to tie the nation's credit rating to the railroad tracks as the train zoomed into view. You can argue, as Conn Carroll does, that "Obama has set himself up for some huge policy victories as long as he wins reelection."

But does the deal make it easier for him to win re-election? When Bill Clinton was triangulating, he had 5.4 percent unemployment to run on. Barack Obama won't have that. He and his party, having given up on John Maynard Keynes, can benefit from this deal only if they were wrong about economics all along. Otherwise, what could Democrats say they got from the deal?

"They get significant deficit reduction, which is going to help stabilize the markets," offered Sen. Max Baucus, D-Mont., chairman of the finance committee.

What about the bigger picture? Leaving aside Obama's prospects, is this the new normal? Are debt-limit hikes always going to be accompanied by spending cuts?

"Look," said Baucus, "whatever works. We've never had deficits this large before, and we've got to get them reduced."

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