By getting his bill passed, Obama has avoided the debilitating fate of being perceived as an inexperienced incompetent who wasted America's time. He should be delighted that it passed, and he is.
Many clever ruses were employed not only to get the bill passed but also to optimize the bill’s impact on his and his party’s electoral success, not least of which is pushing much of the tax pain until after the next presidential election. I have to say, that was brilliant. You have to give David Plouffe some credit. I wish he was on our side, except that I wouldn’t want anyone that dishonest on our side.
Here is the major ramification: the 2012 election, one way or another, will now not be particularly close: Obama will be, by then, either an idiot or a genius. If the economy keeps going despite Obama’s massive new deficits, then Obama will win easily. It will not be close. The objection to a massive new entitlement or a massive stimulus bill is that it is too expensive and will therefore hurt the economy. So if the economy goes sour the Dems will pay the price. But if the economy does not and it turns out that the system can, in the end, support more spending and larger deficits, then Obama wins.
The Democrats complained about Reagan’s deficits. Kennedy, Carter, Mondale, Lester Thurow, Pat Schroeder and Howard Metzenbaum predicted that Reagan would ruin the economy. The Reagan administration set the economy on a course for multiple decades of prosperity and now Reagan is a genius, no one has heard of Howard Metzenbaum and Lester Thurow is a nobody.
In theory, the government can only borrow so much. If it borrows too much, then there is nothing left over for corporations to borrow so the economy goes bad. Or if that doesn't shut things down global financial markets may lose faith in the ability of the government to repay its borrowings, which will drive up interest rates and depress the economy. If the government tries to avoid its debts by devaluing its currency, it will lead to inflation. By whatever theory you like, there is a point at which you have borrowed too much. Just ask Greece. The trouble is that no one knows where that point is. Paul Krugman doesn’t know. Paul Volcker doesn’t know. Alan Greenspan doesn’t know.
Similarly, there is some point at which taxes are too high and people lose incentives to work and invest. So the economy goes bad. We’re not sure when that happens either or how to measure its exact effects, though there is a general notion that we probably reached that point under Jimmy Carter and that the UK definitely reached that point pre-Margaret Thatcher.
But the bottom line is that no one can exactly predict the economy's tolerance for high taxes or high deficits. Chloride is a caustic chemical that can be used to make poison gas. But if you put it together with Sodium to make salt, then in reasonable quantities it makes our food taste great. At this point with respect to major economic phenomena, no one knows what "reasonable quantities" are but we are making some major, and some would say (count me among them), unnecessary bets as to what they are not.
The key is that everyone is on the record. Obama and Krugman are on one side saying that the proposed deficits and necessary taxes (which have not been fully specified) can and will be fully compatible with a successful economy. The Republican Party says they are incompatible. We will find out soon enough. If things go well it will not be a defense to say that whether it went well or not it was an unnecessary risk at a bad time to take an economic risk. If everything works out, no one will care about that. Obama and Krugman will be geniuses.
But if things do not go well and this blows up in our collective face then Obama is Carter 2.0.
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