Is Obama Poised to Botch the Next Round of Fiscal Negotiations?

President Obama examines an XC2V vehicle developed by Local Motors in partnership with the Defense Advance Research Project Agency during a tour of the National Robotics Engineering Center in Pennsylvania on June 24, 2011.

Photo by Saul Loeb/AFP/Getty Images

Noam Scheiber sounds the alarm bells—Obama has a winning hand to beat the GOP on a debt ceiling standoff by taking a hard line, but his administration seems eager to squander its leverage by essentially rolling this issue together with the annual appropriations process and getting sucked into a negotiation.

It’s a good piece, but here are two points that I think it misses. One is that the administration is internally divided over this approach, with the economic team more inclined toward the strategy that Scheiber is disparaging and the political team more inclined toward the strategy that Scheiber favors. The other is that there’s a reason the economic team prefers this strategy—the economic team thinks sequestration is really, really bad.

Individual views differ, but broadly speaking, they think this on three levels. One is that they think tight fiscal policy is really ruinous for the economy in the short run. You know how I’m always banging on about the Fed and QE and forward guidance and NGDP and all that? Obama’s team doesn’t have much faith in this stuff. They think the Fed’s current approach gives fiscal policy room to boost the economy, but that Congress needs to actually seize that room and increase short-term government spending to boost the economy. A second level is that though sequestration has protected key transfer programs from cuts, it has not protected programs that Team Obama views as critical to long-term economic growth. Education is being cut. Scientific research is being cut. America is devouring its seed corn. Third, they think that long-term spending on Social Security and Medicare must not increase by as much as is currently projected. Obama’s view—as a political concept—has always been that cutting these programs is a “concession” that Democrats should swallow in exchange for Republicans agreeing to higher taxes. But in fact his economic team believes on the merits that these programs ought to be trimmed—they simply know that there’s no way a Democratic president or Senate is going to agree to that outside the context of some larger deal.

Put those three together, though, and you see an economic team that believes a large bargain that eliminates sequestration and boosts short-term domestic discretionary spending in exchange for cutting long-term entitlement spending would be a huge substantive win. They believe a deal like that would boost short-term growth (looser fiscal policy), medium-term growth (less hysteresis), and long-term growth (more investment, less money for retired people), and also that there would be positive feedbacks among these effects.

Under the circumstances this makes the economic policy team very eager to see some kind of deal done, and loath to pass up an opportunity—even a small one—to reach some kind of agreement. And I think they make excellent points. That said, the more political counterpoint is also excellent. If Obama frames his goals in small-c conservative terms—no new cuts—and draws a hard line, he is likely to carry the day. If Obama frames his goals in expansive terms—grand bargain—and gets sucked into a negotiation, we run the risk of repeating the disastrous outcome of the 2011 debt ceiling fight. This is one of these situations where I’m glad to be a journalist whose job is to try to understand what people are thinking and why rather than someone who actually has to make decisions. There are good points all around on this issue, which I think is why the White House hasn’t reached a definitive strategy.