AMERICA DIDN'T BUY IT

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By Ezra Klein
Washington Post Staff Writer
Sunday, January 31, 2010

Few are as good at delivering a high-stakes speech as President Obama, something he proved again in Wednesday's State of the Union. The speech, which focused on jobs and the economy, was feisty, confident and -- rare for presidential addresses -- funny. The insta-poll numbers were great. Joe Klein called it "Obama at his best." It was so good, in fact, that virtually nobody noticed that Obama had already lost the argument.

The tell came a few days before, when the White House proposed a -- deep breath here -- non-security discretionary spending freeze. The inelegantly titled policy halts spending growth in a category that accounts for 13 percent of the federal budget. From the perspective of long-term deficits, that spending -- much less its growth over three years -- is insignificant.

A spending freeze might be what Americans envision when they think about deficit reduction. The only problem is, it won't do much to reduce the deficit. As the Economist pointed out, "Mr. Obama has apparently concluded that the electorate can't be expected to handle anything like a real description of the tough decisions which must be made."

It wasn't always thus. The administration's first year was premised on two very difficult, very counterintuitive and very important economic arguments. The first was that the deficit problem is a function of health-care spending. The second was that the government's role in a recession is to spend, and to spend hard. The rhetoric and policy of the past week were proof that Americans have not been convinced.

"Our health-care problem is our deficit problem," Obama said in September. "Nothing else even comes close." He's right. The Center on Budget and Policy Priorities made the point clearly in a recent report on the budget outlook. The whole game, they wrote, is Social Security, Medicare and Medicaid. "Growth in those programs accounts for all of the increase in federal spending as a share of GDP over the next 40 years," they said. Total spending for everything else, from agriculture to education to missile technology, is predicted to grow more slowly than the economy.

The spending freeze exempts entitlement programs. That is: It's focusing on the part of the budget that's not a problem. Social Security, meanwhile, is on a perfectly manageable trajectory. It's Medicare and Medicaid -- whose rate of spending is driven by the rest of the health-care system -- that break the budget. That's why health-care reform was so important to former Congressional Budget Office director Peter Orszag, and why the administration pushed so hard for a deficit-improving bill that included an independent Medicare Commission empowered to control Medicare costs.

But the effort was wasted, at least from a public relations perspective. A January poll conducted by the Kaiser Family Foundation found that 60 percent of Americans thought the health-care reform bill would increase the deficit, and only 15 percent thought it would reduce it. The presidential speeches, the Congressional Budget Office's estimates, the letters signed by dozens of leading economists -- none of it had worked.

The story on the stimulus is similarly depressing. At its base, the stimulus is Keynesian economics in practice. A recession hits, and individuals and businesses become scared that they're next on the chopping block, so they stop spending and start saving to protect themselves from the hard times to come. That drains demand from the economy, and without demand, the hard times get even harder. Government is the only player able to disrupt this vicious cycle. By sharply increasing its spending, it can generate demand, improving the economy until individuals and businesses are comfortable reentering the marketplace.

Key to this whole theory is that the government should act "counter-cyclically": In good times, it should save and store, and in bad times, it should spend and borrow. The exact opposite holds true for businesses and individuals, which makes the whole project pretty unintuitive.

Students in macroeconomics classes learn all this in the first week of September. After a year of trying to explain it to an economically distressed nation, however, Obama basically gave up. Instead, he bowed before the entrenched, incorrect, conventional wisdom. "Families across the country are tightening their belts and making tough decisions," he said. "The federal government should do the same."

Well, no. It shouldn't. The government should not tighten its belt until the people can loosen theirs. That's why the stimulus was a good idea, and why Obama is asking Congress for another stimulus, although this one's being called a "jobs bill." But the stimulus proved almost impossible to explain, and it was far too small, given the size of the recession. As a result, people are very worried about jobs, and they're very worried about deficits, and instead of trying to convince them that deficits make good sense until job growth is back to normal, the administration is trying to appease those fears so it can get on with the rest of its agenda.

But it means that Obama has more to fear than the 60-vote Senate or the cowering Democrats in the legislature. Obama is no slouch as a communicator, and the raw material of the recession and the long-term deficit were plenty dramatic. This was as teachable a moment as American politics can be expected to offer, but few took the lesson, which has made it difficult for the Obama administration to pass policies based on those arguments.

Changing minds is very hard. But if you can't do it, changing policies is even harder.


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