Tuesday, August 09, 2011

In Place of a Villain

By Mike Dorf

As Paul Krugman noted yesterday, the gall of S&P is, well, galling.  First S&P plays a substantial role in crashing the global economy by giving AAA ratings to junk that is opaque to investors; then, having largely escaped any serious repercussions, it errs in the opposite direction by downgrading US debt when very low interest rates reflecting dispersed knowledge of a transparent asset suggest virtually no risk.

To my mind, though, S&P is not the primary villain du jour.  One can quibble with S&P's bottom line, but its methodology strikes me as sound.  In evaluating sovereign debt, it's legitimate to take account of the politics of the sovereign in question.  I still think S&P made the wrong call here, mind you.  Even had a deal not been struck in Congress, the U.S. was going to prioritize the paying of bondholders.  So the risk that the U.S. will actually default on T-bills strikes me as not substantially higher today than a year ago.  And as the other ratings agencies have noted, the U.S. debt/GDP ratio is within shouting distance of other countries with AAA ratings on their bonds.  So S&P got it wrong, but in a way that is at least defensible.  (I'm putting aside the $2 trillion error, and the refusal to explain why correcting the error didn't alter S&P's analysis.  Those are inexcusable, although the bottom line judgment still could be seen as reasonable)

The real prize for chutzpah surely must go to those Republican Presidential candidates who, less than a week after opposing raising the debt ceiling, have pointed to the S&P downgrade as evidence of President Obama's failure of leadership.  My seven-year old daughter acts this way sometimes.  She'll spill a glass of water on herself and then scream at her sister, her mother or me that one of us made her wet.  We try not to give her too hard a time when this happens because she didn't want to spill the water in the first place and, after all, she's seven, so we expect her to grow out of this behavior as she matures.  Bachmann is 55.  Mitt Romney is 64.  Meanwhile, Mitch McConnell--who was, relatively speaking, a voice of reason among Republicans during the debt ceiling showdown--has returned to his obstructionist roots and promised future hostage-taking the next time the debt ceiling needs to be raised.  McConnell is 69.  I'm guessing that none of the Republicans will grow up in the next couple of years.

Now, before my right-leaning readers fire off outraged comments, I'll acknowledge that there is a counter-narrative in which the Republicans in Congress and elsewhere were using the debt ceiling to address what they thought was the real problem: namely, the debt.  After all, they say, S&P downgraded U.S. paper because of the underlying fiscal risk, which is occasioned by over-spending.  This would be a fair point if it were remotely accurate.  The S&P downgrade was indeed based on projected debt levels, but S&P, like the President and other Democrats, and unlike virtually every Republican holding or seeking elective office, understood that the core problem is the gap between taxes and spending, not spending in isolation.  So the Republican claim to be concerned with deficits and debt is belied by their commitment to extending the Bush tax cuts for upper-income earners and their opposition to anything that can be labeled a tax increase.  Okay, outraged right-leaning readers.  Now you can fire.

Meanwhile, me the real question all of this raises is what, concretely, the President should do.  By that question, I don't really mean what should President Obama do.  Although Obama has now ordered the firing of more predator drone strikes and Navy Seal search-and-destroy missions than all other Nobel Peace Prize winners combined, he seems by nature incapable of treating his domestic political opponents as enemies.  That is no doubt to his credit as a human being.  But as a President, not so much.  Thus we might ask what a Democratic President willing to give as good as he gets would do: WWFDRD, or better yet, WWLBJD?

Drew Westen's brilliant account of where Obama has gone wrong tells us what he might have done differently from day one.  (Answer: Nearly everything.)  But it tells us very little about what he should do now, even if he were capable of channeling his inner LBJ.  Focus on creating jobs?  Sure, but with what?  The deal to which he just agreed (albeit over a barrel) will mean more cuts in state and local government jobs, acting in effect as a negative stimulus.  And anyway, because the President jumped on the deficit-reducing bandwagon well before Republicans demanded that he do so, there is, at this point, no political will for more stimulus.

What the President needs, Westen says, is a villain.  But by temperament, Obama is extremely reluctant to identify one.  So I think he should turn to the next best thing: The flaws in our political system that have permitted a tiny percentage of the American electorate to capture it for their own private ends.  In my next post (on Friday), I'll propose some language for the speech I would write for his re-election campaign.


Larry H said...

Love your analysis, as always. Have you considered as Glenn Greenwald and Matt Taibbi have recently posited that the ultimate result was exactly what Obama wanted all along? Greenwald: "Obama's so-called 'bad negotiating' or 'weakness' is actually 'shrewd negotiation' because he's getting what he actually wants (which, shockingly, is not always the same as what he publicly says he wants). In this case, what he wants -- and has long wanted, as he's said repeatedly in public -- are drastic spending cuts. In other words, he's willing -- eager -- to impose the 'pain' ... on those who can least afford to bear it so that he can run for re-election as a compromise-brokering, trans-partisan deficit cutter willing to "take considerable heat from his own party." Taibbi: "The Republicans in this debt debate fought like wolves or alley thugs, biting and scratching and using blades and rocks and shards of glass and every weapon they could reach. [¶] The Democrats, despite sitting in the White House, the most awesome repository of political power on the planet, didn't fight at all. They made a show of a tussle for a good long time -- as fixed fights go, you don't see many that last into the 11th and 12th rounds, like this one did -- but at the final hour, they let out a whimper and took a dive. [¶] We probably need to start wondering why this keeps happening. Also, this: if the Democrats suck so bad at political combat, then how come they continue to be rewarded with such massive quantities of campaign contributions? When the final tally comes in for the 2012 presidential race, who among us wouldn't bet that Barack Obama is going to beat his Republican opponent in the fundraising column very handily? At the very least, he won't be out-funded, I can almost guarantee that. [¶] And what does that mean? Who spends hundreds of millions of dollars for what looks, on the outside, like rank incompetence? [¶] It strains the imagination to think that the country's smartest businessmen keep paying top dollar for such lousy performance. Is it possible that by "surrendering" at the 11th hour and signing off on a deal that presages deep cuts in spending for the middle class, but avoids tax increases for the rich, Obama is doing exactly what was expected of him?

Sam Rickless said...

What should President Obama do? Finding a villain may be important for his re-election, but that is not a prescription for solving the nation's economic problems (except very indirectly). Besides, if Obama acts no differently in his second term, then what's the point? Sure, he can threaten to veto the worst Republican proposals, but in the end what difference does it make? If he compromises by giving away most of the store before negotiations begin, then we might as well allow things to get much worse under a Republican President and then hope for a groundswell of support for a true liberal in the model of FDR.

Obama, like many pragmatic politicians, is fundamentally a political opportunist. He looks at where the winds are blowing and then follows. He is trying to do a Bill Clinton on the Republicans, by embracing the need for deficit reduction before they make it a campaign issue. It worked for Clinton, but it's not working for Obama. The main reason for this is that the Republican economic proposals that Obama is espousing, as the Republicans themselves well know, are a recipe for disaster. I actually think that the Republicans are working hard to kill the economy so that they can blame Obama for it in 2012. So far, Obama thinks he's doing a Clinton; but in fact he's only digging a deep hole for himself and his fellow Democrats.

Obama should take a page from his own successful Presidential bid in 2008. At that time, he argued that he was one of the very few who had the courage to publicly oppose the (second) Iraq war early on. This was true. Those who voted for him voted for someone they thought had the courage of his convictions and the ability to articulate them. This is what the country needs now. This is what Obama and the rest of his party needs going into 2012.

Watching the carnage on Wall St. now, Obama should come out and say: enough is enough. Like Truman, he should declare the need for an Emergency Session of Congress to discuss injecting job-creating funds into the economy and raising additional revenues through income tax hikes on the rich and the closing of egregious job-killing corporate loopholes. He should explain why we got into this mess and what is needed, economically speaking, to get out of it. He should dare the Republicans to get in his way. And if Congress fails to act, he should pull a Truman and run against the do-nothing Laffer-curve voodoo-economics Republicans.

michael a. livingston said...

Following this analysis, if your daughter constructed a more compelling "narrative"--if she, let us say, attacked you and Sherry for being careless parents; for using glass rather than plastic dishes; or for imposing a cultural standard of cleanliness that is destructive of her creativity--she would become more successful regardless of the fact that the floor remained wet and the glass empty

michael a. livingston said...

More seriously, perhaps, I find the whole "Obama failed to communicate" argument dispiriting and somewhat cowardly. I think he has been pretty clear about who he was and where he was going all along. Wouldn't it make more sense for liberals to fight back than invent reasons for failure?

Neil H. Buchanan said...

What I like about Larry H's comment is that it directly says what so many people on the left and center-left (and even center-right) have refused to believe for so long: Obama is not what we thought he was. He's actually an anti-government conservative, willing to stick it to the most vulnerable and protect the moneyed elite. The evidence is crystal clear, but because he's nominally a Democrat, people continue to imagine that he is something different.

Sam Rickless is probably right to attribute all of this to opportunism rather than conviction. (No reason to think that Obama is in any way committed to anti-Keynesianism, as a matter of ideology or even as a consistent guide to policy.) In any case, we no longer have any excuses for not seeing what is in front of our eyes.

Blud Bitter said...

英文seo Following this research, if your child designed a more gripping "narrative"--if she, let us say, infected you and Sherry for being dangerous parents; for using cup rather than vinyl material dishes; or for upon a social normal of health that is dangerous of her creativity--she would become more profitable regardless of the truth that the earth you will find wet and the cup clear