The debt ceiling issue is not entirely behind us yet, but it is looking like it will be at this point. So it's time for me to revisit the question that I have been struggling with for awhile, of why the President does what he does. How can we understand him, when he so frequently leans away from his base despite getting punished for it? What lessons can we learn about his axis of progress from this most recent debate?
Professor Christophe Chamley provides important context that should remain with us as we look back:
The House Republicans, many of them opposed to raising the federal government’s borrowing ceiling, might take a lesson from the first sovereign debt crisis: Spain’s default in 1575. What events more than 400 years ago suggest is that it’s easy to ignite a dangerous chain reaction in financial and credit markets and inflict lasting damage on the economy.
Republicans today are playing the part of the cities of Castile, whose delegates to the Cortes (the Spanish parliament) opposed raising taxes to service King Philip II’s long-term bonds.
[...]
The cities wanted to stop Philip’s spending. They knew that bonds not explicitly backed by dedicated taxes would be very tough to sell, that a default would make it even harder for Philip to borrow without their help, and that his lack of direct taxing authority would force his hand in a standoff. But after the payments stopped on the short-term debt, things careened in an unexpected direction, much as they did after Lehman Brothers Holdings Inc. failed in September 2008. Many bankers who had lent to the king were, themselves, leveraged. The payment halt froze the funds deposited by local merchants to the bankers.
[...]
After two years, in November 1577, the cities caved, agreeing to a very large tax increase. The king resumed debt payments to the bankers. As the king explained in the settlement agreement, called Medio General, the bankers were joined in their demands “by the petition of the delegates of the cities with particular urgency about the same business.” In other words, the cities were begging the king to restore the business of trade. The fairs at Medina del Campo resumed late in the next year, but they had lost their preeminence forever.
What’s the message for the House Republicans today? First, don’t overestimate your power. Second, history stays with us. Spain’s default is 424 years old, but its story is still being told and may, to this day, be affecting that nation’s perceived creditworthiness and cost of capital.
In the context of this discussion, we should not forget just how far-reaching sovereign default can be. The Spain of today is far from the pre-eminant economy it was during the Renaissance, and while we have to be careful not to pin that entirely on its default, the parallels and the lessons to be learned from that history are relevant here.
That said, what can be said of the deal that was struck, and who actually won this negotiation?
One thing can be said for certain. The American people are not the winner on this. The cut of ~$2.5tn over the next ten years is front-loaded, meaning it will impact us at a time when demand is low, interest is cheap, infrastructural and other spending is needed, and jobs are needed. Our output gap (the measure of how much under capacity we are operating) is about 9%, meaning if only we had more demand we could produce that much more product without retooling or expanding our factories and service industries. This 9% annual loss is permanent, because we cannot go back in time and make up for the lost potential. This agreement will further decrease demand, because now less money is at market. A feedback loop is in play, where further decreases in demand will lead to more layoffs, higher unemployment, less job security, and therefore less spending, lower housing values, lower paychecks, etc. While we avoided a default, our economy--meaning the real human beings who are part of it--did not avoid injury here.
Secondly, there is a lot of anger. Stanley Greenberg wrote a very important article in which he laid out that the Democratic party fares less well than its individual policies because Americans have a large amount of distrust for the government: they think the wrong people are favored by legislation, they think their own priorities are not Washington's priorities, and they think that bribes and not votes drive Washington. He says that despite Democrats' better record during leadership, they are seen as a proxy for governmental function, therefore any event that damages trust in government damages Democratic prospects.
For this reason, any major hurdle in government policy like this disproportionately hurts the Democratic party's prospects, according to Greenberg.
This may not be lost on the president. As I discussed in a previous post regarding the President's axis of progress, one of the defining lessons in his style of governance was the lesson he learned during the health care reform debate in 2009-10: even if the policy is popular and necessary, if it drags on it will hurt the presidency. The political deadlock, even if it is for a good, necessary, and contentious cause, will harm the President even if he is on the people's side. Therefore he has tried to keep things moving since then, even if it costs his side in terms of policy. Policy gets forgotten in two weeks, even if it is hard to stomach at the time.
Instead, it seems like he is focusing on accomplishments that really do have significant lasting power. For example, we still talk about President Clinton's deficit reduction, and that accomplishment has almost single-handedly given him broad credibility to comment on current economic matters a full decade after he had left office. Not only that, but it is a resounding political accomplishment for the Democratic party that, despite a tendency to hate on Clinton-era economic policies like NAFTA, nonetheless are able to claim economic acumen based on the deficit reduction that occurred in the late 90's.
So, it is not terribly surprising to me that President Obama is (a) focusing on deficit reduction even though jobs are the main issue for the public, and (b) willing to swallow something like the spending cuts we are hearing about in order to keep the government moving. The political incentives for these are clear based on recent memory, so these are historical pressures that are causing his axis of progress to diverge from that of his voters and his base.
Now, one thing we should be careful about is distinguishing President Obama's policy from his compromises. He does compromise to the right, but surveying the layout of this particular battlefield gives good reason why. He wants policy moving forward, and in this case the Republicans (especially the tea party contingent, but also the slightly "good cop," Rep. Boehner, who was demanding more and more based on his inability to deliver the tea party contingent) were able to convince Democrats and the country that they weren't bluffing when they threatened to default the economy. So in this case, because Democrats were unwilling to let the economy collapse just to make a point, and since collapse of the country occurred on a "no" vote that they could do nothing about on a mechanical basis, they gave away quite a bit. Based on those terms, they didn't have much leverage and it doesn't make much sense for them to try to win major concessions. They did manage to protect Social Security and Medicaid completely, and protect Medicare to the extent that recipients would not see cuts as a part of the spending reduction. However, they got little back. This should have been expected, because they had the bigger stake in functioning government and in the economy, and were not willing to play chicken on these principles. For the Democrats, this was not a good battlefield to make a substantial or final stand, because the terrain was so against them. In principle, they should make their bold stand when the "no" vote favors their policy stance, because then they have great leverage and can draw out concessions for everything they give up. (We saw this in the Bush tax extension last December, where they were able to draw out everything from START ratification to 9/11 worker health care coverage based on extending the Bush tax cuts--though I am still personally bitter about that particular $4tn concession.) Now.... can we have faith in Democrats to actually cash in their credits and make full use of their leverage when they have it? Maybe not, if history serves as any indication.
The only good news for them is that they were aligned with voter and funder preference on this point, and in particular with moneyed interests who now have witnessed the Frankenstein they have created in the tea party, and might not be so sure if they'd rather lean Republican anymore.
So for now Republicans get concessions (though conservative blogger Eric Erickson does not consider it a victory), but this time it was at the cost of substantial Republican brand damage. Is the defense of tax loopholes politically worth that kind of brand damage? Probably not, because even though tax loophole defense translates into corporate political contributions normally, in this case some of the principle brand damage took place from the perspective of moneyed interests because the debt default had serious negative economic implications; therefore, in this case the struggle served to alienate Republicans from a contingent of their backers.
Brand damage should not just be dismissed as a "soft" gain. It can be quantified in terms of votes, and votes can be quantified in terms of future policies. In highly contentious congressional configurations like the current one, inflicting brand damage to the more extreme party should be the name of the game for more reasonable opposition parties. The political landscape is not such now, as it was in 2009, where Democrats stand to make sweeping gains, or even where they stand to leave Progressive policies untouched. A Democratic president and a Democratic senate is one Congressional branch away and one Judicial branch away from being poised to make strong legislative gains, a la health care reform or social security. Like storing nuts for the winter, brand damage is the way that Democrats can move forward to more substantive gains in the medium term.
In particular, even if the only gain for Democrats in the next decade is to replace one Antonin Scalia or Clarence Thomas in the Supreme Court with another Elena Kagan or Sonia Sotomayor (or even better, a Louis Brandeis), then that would be game-changing in terms of the direction of the country. It would allow, for example, reinterpretation of corporate personhood or unlimited financial bribes contributions to politicians.
And at this point, we come full circle. Bribes and corruption are the main issues in national politics, even if they are not on the front page every day, because they have tentacles that extend to every aspect of contentious politics as know them them today. As long as that is the mode of Federal government, the Greenbergian argument will hold a lot of water and Democrats will suffer for it at the polls. Even if they are the victim of Citizens' United style money pressure.
Based on events like the debt ceiling struggle, it is becoming increasingly clear how to understand President Obama's axis of progress and therefore his prerogative in negotiations and politics. He learns very quickly and is willing to rewrite his understanding of the world on a regular basis. These are good qualities for an academic to have, but when it comes to politics it leaves him looking like an opportunist without firm conviction on his stated stances. And the lesson these policy struggles have been teaching him is that he can make the biggest gains, or do damage control, by passing policies quickly and giving up most of his initial position. And he can count on his base to be upset, even if he delivers them a substantial win at great political cost (remember the health care reform), but to perk up again the moment the news becomes good (remember the bin Laden news earlier this year, and how quickly everyone rallied to him again in his base).
So the elusive picture of how to understand President Obama is crystallizing for me. He's not a caver, or a bad negotiator, which are commonly tropes that are applied to him. I had to dig well outside of the common set of descriptions to come up with just the right analogy. Obama is a political, min/maxing Red Mage (of the 8-bit theater variety). He is willing to swap out principles that are not providing much bang-for-buck with others that do better, even if they completely redefine his outlook and goals. Of course, the downfall is that because of his triangulation he's prone to the dragonfood strategy:
Cross-posted at: Gnomanomics