Tuesday night President Obama appeared undeterred by the consequences of debt and long-term deficits in his budget, arguing his fiscal “investments” are inseparable from the economic recovery. In coming months, however, messages from the bond market and foreign investors may change his tune. Consider a bit of history.
In January 1993, President Bill Clinton and his economic team also faced some sobering news. New budget estimates revealed a federal deficit swelling to dangerous levels, threatening prospects of a much-needed sustained recovery. The economy faced stiff headwinds, drying up tax revenues and blowing holes in the hopes to reduce red ink.
A powerful group of Clinton’s economic aides argued that navigating these tricky shoals required a substantive agenda shift. The president listened and pivoted. At the urging of advisors Robert Rubin, Lloyd Bentsen and Larry Summers–and to the consternation of his political team, fresh off a November 1992 victory–Clinton shelved a middle class tax cut and several spending initiatives promised during the campaign. Instead he embraced a deficit reduction plan–signaling to Wall Street and the Federal Reserve his commitment to fiscal discipline.
Curbing the deficit was not the new president’s first preference, but he had few options. The fiscal hawks argued the success of his presidency depended on the gestures the White House sent with its initial budget document. Insider accounts detail Clinton’s frustration with the budgetary and economic realities. Democratic pollster Stanley B. Greenberg writes about Clinton’s irritation in his memoir Dispatches from the War Room. In one of his first meetings with his economic team the president remarked, “You mean the success of the program and my reelection hinges on the Federal Reserve and a bunch of f—ing bond traders?”
Despite his aggravation, Clinton relented. He changed some of his campaign plans to fit the new economic conditions, mollifying the bond market enough to avoid increased long-term interest rates.
Today President Obama faces an even more dismal fiscal outlook. The Congressional Budget Office (CBO) estimate of the White House budget released last Friday projects deficits and debt that could bankrupt the country. House Republican Leader John Boehner said on Tuesday night that if you add all debt accumulated in our country by 43 Presidents in 220 years of our history through 2008, President Obama’s budget will double that over the next six years. “I just think that this may be the most irresponsible piece of legislation I’ve seen in my legislative career,” Boehner concluded.
Americans instinctively understand the coming debt tsunami, and would likely be forgiving if the president used these circumstances to throttle back his ambitions. When given a choice, they consistently pick economic growth over policy reform. For example, a recent Rasmussen poll finds a plurality of voters (49 percent) want the president to delay health care reform until the economy improves. Only 42 percent say he should move ahead now. Gallup reports Americans are similarly reticent on environmental policy: “For the first time in Gallup’s 25-year history of asking Americans about the trade-off between environmental protection and economic growth, a majority of Americans say economic growth should be given the priority, even if the environment suffers to some extent.”
Obama’s attitude is somewhere between disingenuous and recklessly undeterred. He repeatedly argues his budget plan cuts the 2010 deficit in half by the end of his first term. It may. But the projected 2012 deficit is still higher than any in recent history, and the numbers balloon to unsustainable levels in the out years (2013-2019).
The White House also insists we must spend more to realize future economic growth and savings. “If we don’t tackle [issues like health care, education and the environment],” the President argued at his press conference on Tuesday night, “we won’t grow.”
But the president’s budget and the pile of debt it produces has already caused Senate Democrats to propose some major adjustments. And more are on the way as Congress crafts its version of the budget this week and next.
Back in the 1980s, Wall Street economist Ed Yardeni used to say the “bond market vigilantes” would not allow federal debt to get out of control. He argued market forces would drive up interest rates if the deficit and borrowing continued unchecked, leading the political class in Washington to respond accordingly. Bill Clinton listened; Barack Obama may have to do the same.
And while the vigilantes have been somewhat discredited–and may be busy burying their bonuses in the Hamptons–they can still pack a wallop when it comes to interest rates as they gauge the impact of unrestrained government borrowing and debt.
Obama’s bloated budget is also bursting with irony. It’s odd, for example, that at a time when the private economy is “deleveraging,” the government is piling on new debt. But in what may be the biggest irony of all, the same bond traders whose compensation Mr. Obama wants to rein in could end up forcing him to curb his own spending enthusiasm.
Gary Andres is vice chairman of research at Dutko Worldwide in Washington, D.C., and a regular contributor to THE WEEKLY STANDARD Online.
