What Obama left out of his speech on the economy

Updated
U.S. President Barack Obama speaks about the economy to mark the five-year anniversary of the U.S. financial crisis at the White House in Washington...
U.S. President Barack Obama speaks about the economy to mark the five-year anniversary of the U.S. financial crisis at the White House in Washington...
Kevin Lamarque/Reuters

President Obama used the five-year anniversary of the financial crisis as a political cudgel: in a speech on Monday, he blasted Republican threats to use the debt ceiling and a government shutdown as negotiating chips for imperiling the economic gains the country has made since 2008.

The president neglected to mention a fundamental truth about what Democrats really want out of the next budget debate: not to replace sequestration so much as ignore the automatic cuts entirely, increasing spending significantly from the current year’s levels–even if long-term deficit reduction must be put off for later. And failing to embrace that goal explicitly could ultimately undermine Democrats’ case against the GOP-backed spending cuts they have promised to undo.

Obama celebrated the progress that the economy has made since the depths of the financial crisis, but argued that Republicans were threatening to undermine those gains with their current budget strategy. ”What all this means is we’ve cleared away the rubble from the financial crisis and we’ve begun to lay a new foundation for economic growth and prosperity,” Obama said. “The problem is, at the moment, Republicans in Congress don’t seem to be focused on how to grow the economy and build the middle class.”

But some of the economic achievements that the president highlighted were actually the result of Democratic acquiescence to Republican spending cuts in previous rounds of this budget debate, helping to pave the way for these reductions to stay in place.

“Up until now, Republicans have argued that these cuts are necessary in the name of fiscal responsibility. But our deficits are now falling at the fastest rate since the end of World War II. I want to repeat that. Our deficits are going down faster than anytime since before I was born,” Obama said, as applause broke out from the hand-picked members of the public who were flanking him on the podium.

In suggesting that falling deficits were something to celebrate, or at least politely applaud, Obama helped make the case for maintaining the policies that got us there. One major reason that deficits are shrinking so quickly right now is because both Democrats and Republicans agreed to a deal during the 2011 debt-ceiling crisis with significant spending cuts: $900 billion in upfront cuts and $85 billion more this year due to the automatic cuts under sequestration.

The Obama administration has acknowledged before that these cuts haven’t been a good way to reduce the deficit. “Bad policy is driving down the deficit more quickly than anyone intended,” as Treasury Secretary Jack Lew admitted in May. Economists almost uniformly agree that fiscal contraction has slowed GDP growth this year, which Obama noted in passing during his speech. But Obama ultimately made his case against sequestration without explaining Democrats’ fundamental change of heart on the 2011 deal that wrote them into law.

Originally, sequestration was meant to be a forcing mechanism to be replaced with a bipartisan “grand bargain” to reduce the long-term deficit. In April, President Obama proposed replacing the discretionary cuts under sequestration with alternative forms of deficit reduction in his 2014 budget. But hopes for such a deal have all but evaporated as Republicans still refuse to accept Democrats’ demands to use new tax revenues for deficit reduction.  And Democrats have made it clear that they no longer believe that sequestration will pave the way for sensible deficit reduction: Senate Democrats are supporting a $1.058 trillion budget for 2014 that ignores sequestration rather than trying to replace it with alternative deficit reduction.

In doing so, Democrats have essentially disavowed the goals of the 2011 debt-ceiling deal—vowing never to negotiate over the debt-ceiling again and arguing that short-term spending hikes need to happen, even if long-term deficit reduction (entitlement and tax reform) has to wait for another day. But Obama continues to stress the need to “replace sequestration,” implying that other cuts or revenues need to take its place: in his speech, he declared that “the first order of business must be to pass a sensible budget that replaces the sequester with a balanced plan.” 

There are obvious political risks to arguing explicitly for more spending and slower deficit reduction. Obama’s speech took the safer route of criticizing Republicans for proposing “even deeper cuts to education, even deeper cuts that would gut America’s scientific research and development” and elsewhere . But even then, the president avoided explaining specific ways in which the current cuts have undermined our economic growth—perhaps remembering how his administration got burned earlier this year for overstating some of sequestration’s impact.

Such arguments may still come later: Obama’s most immediate priority is to put pressure on Republicans for threatening to shut down the government and risk a default over Obamacare and spending. But failing to make a full-throated case for spending more than the status quo, even if it increases the short-term deficit, will ultimately make it harder to reverse the cuts that have already happened.

What Obama left out of his speech on the economy

Updated