Benjamin Studebaker

President Biden is negotiating with congressional Republicans to raise the debt ceiling, and there are reports that progress is being made on a deal that involves “cutting spending.” There has been talk that Biden might try to avoid a deal by minting the coin or invoking the 14th amendment. But Biden has always emphasized that he values consensus and compromise. The conservative Supreme Court might not go along with an attempt to use the 14th amendment, and shoving the coin down his opponents’ throats has never really been Biden’s style. It all reminds me of the debate from a decade ago. This blog was young back then, and I wrote a lot about Obama’s negotiations. Let’s revisit that period, shall we?

Back in 2011, President Obama faced the same problem President Biden now faces. Congressional Republicans refused to raise the debt ceiling unless Obama agreed to budget cuts. There was talk about minting the coin and invoking the 14th amendment, but Obama felt these radical, unilateral steps would divide the country and worsen creeping polarization. Instead, he cut a deal. He signed the Budget Control Act of 2011. It committed the federal government to sequestration, and to enormous cuts. Over the course of 2012, it became clear that these cuts would cause serious damage to the economy. So, to limit the severity of the shock, Obama negotiated another deal that would save most of the cuts for 2013. Over the course of 2013, the same arguments were made again, but this time Obama was unable to secure another delay, and the cuts took effect.

As shares of GDP, the cuts were comparable in size and scope to all but the heaviest European austerity packages of the same vintage:

The countries that made cuts saw their economies contract. Even in 2013, we had good evidence that cuts of these sizes would reduce GDP growth. In the UK, growth during the austerity years was markedly poorer:

In austerity years, European countries often saw growth flatline:

In the United States, 2013 became an especially nasty year for growth. Instead of continuing to push up toward 3%, growth dropped back below 2%:

Ultimately, the Federal Reserve fought against the contractionary effects of the cuts by keeping interest rates extraordinarily low. The rate remained near the zero lower bound until 2016:

The Federal Reserve also announced a third round of quantitative easing in late 2012. The Fed bought $40 billion to $85 billion in mortgage-backed securities a month to keep the financial system flush with liquidity. Purchases continued until the end of October in 2014. This monetary intervention cushioned the effects of the austerity, but it achieved this mainly by throwing money at the financial sector. The policy kept mortgages affordable, but it tended to produce uneven growth, focused around financial centers and on the specific sectors bankers were keen to invest in. During the back half of the Obama administration, there was substantial job growth in major cities where the tech and financial sectors are prominent, but job losses in rural areas:

The resentment this uneven growth created often metastasized into the cultural sphere. Americans who lived outside the major cities became frustrated that the government was not prioritizing local conditions in their areas. This resentment did not merely extend to Americans who were personally financially imperiled. It also included many people who were personally doing all right, but felt that the federal government prioritized the interests of transnational corporations, globe-trotting oligarchs, or minority groups over their communities. They blamed not just the rich and the powerful, but also immigrants and out-groups. This was the environment in which Donald Trump’s presidential campaign thrived.

Once President Trump was elected in 2016, we stopped talking about the events that led us there. To suggest that the economy had anything to do with Trump’s success gave aid and comfort to his supporters, and his supporters often took cultural positions with which very few educated elites wished to be associated. Political scientists set up a dichotomy between economic explanations for the electoral result and cultural explanations, ignoring the sense in which the economy conditions the culture. Resentment of elites can easily be transformed into resentment of those who look or sound a little different. We used to know this.

But over the years all of this was forgotten, and now a new Democratic president is poised to do the very same thing that Barack Obama did. If Biden agrees to cut spending, the economy will be damaged. But that’s not all. The Federal Reserve will have to act to limit the damage the cuts will cause. At this point, the annualized growth rate has slowed substantially, to under 2%:

Spending cuts could lead to a recession, or to a level of stagnancy that is politically intolerable. Someone like Donald Trump will take advantage of that situation, if nothing is done. So, if there are spending cuts and growth falls further, it’s highly likely that the Federal Reserve will have to start cutting interest rates again. When the Federal Reserve cuts the rates, it cushions the economy at the cost of distributing more wealth and power to the financial sector and the sectors the banks are keen to invest in. Those sectors are disproportionately concentrated in the same urban counties where most of the growth occurred during the Obama administration. So, while the Federal Reserve will be able to reduce the immediate consequences for the American economy as a whole, it will do this by exacerbating inequalities, not merely between rich and poor individuals but between rich and poor geographic regions. That will breed an all too familiar kind of resentment.

If the cuts happen and the Federal Reserve does nothing, poor growth will put Trump in a stronger position. But if the Federal Reserve does act, the Federal Reserve will be unable to get the right distribution of growth, and inequalities in the distribution will also put Trump in a stronger position. It becomes a lose-lose situation for the administration heading directly into the 2024 election cycle. Even if it doesn’t put Trump in position to win the presidential race, it will surely help the Republicans perform better in downballot races.

Those Republicans will, of course, oppose any effort to raise tax rates. Because the Biden administration can’t raise taxes, it has no means of controlling inflation with fiscal policy. It therefore relies on the Federal Reserve, and the Federal Reserve’s interest rate hikes are poorly targeted, damage growth, and produce bouts of unemployment. The weak economy created by the rate hikes is an economy where the same tax rates generate less revenue. That creates more political pressure to cut spending. When the government acquiesces to that, it become even more dependent on the Fed to handle the fallout. That leads to more uneven growth, and that leads to more resentment, more cultural antagonism, and more wins for the Republicans, who then further frustrate the fiscal position.

We’ve been going around and around in this loop for a while. Our public services deteriorate, our people become increasingly miserable, and the more miserable they become, the more likely they are to vote for candidates and parties that present themselves as anti-establishment but which are in fact wholly committed to accelerating the process.

It is for this reason that it is so completely counterproductive to support Democrats like Biden in the first instance. They negotiate bad deals with Republicans that strengthen the GOP’s position in the long-run. But the voters who fear Donald Trump feel compelled to vote for these Democrats anyway, to prevent the GOP from winning in the near-term. Even Bernie Sanders has endorsed Biden’s re-election bid. If you don’t vote for the Democrats, the Republicans win now, and if you do vote for the Democrats, the Republicans win later. Why do you even bother? It’s pretty clear none of it makes a bit of difference.

And don’t even start with that nonsense about Marianne Williamson – who had terrible favorability ratings throughout the 2020 primaries – or Robert F. Kennedy Jr., whose positions on vaccines will swiftly alienate him from Democratic primary voters, most of whom like to think of themselves as loyal to “the science.” We cannot vote our way out of this mess, folks.

For more despair, check out my book: https://link.springer.com/book/10.1007/978-3-031-28210-2