Budgets, the Economy, the Future, and Slightly More on Jack Lew

Shaping the future with today’s choices.

I think we need an actual, real dialogue about America’s economic future. This blog is intended to help. I found upon reading Marshall Auerback’s highly critical blog about Jack Lew, President Obama’s nominee for the next Director of OMB, that we actually had some — admittedly hard to see — common ground on which I want to build.

But that common ground does not include the critique of Jack Lew. So let me be clear: I think that the criticism was unfair and, in its spirit, inaccurate, and the tone of the criticism is representative of an approach to politics that precludes any conversation. If someone as capable as Jack Lew — whom I think is a spectacularly good choice — is unacceptable to “progressives,” then President Obama is in deep trouble. Jack Lew is 54 years old, 52 when he joined the Obama Administration. During the approximately 30 years of his previous career, he spent more than 28 years (93%) in public service and education and about two years in the private sector. He served with distinction as a senior congressional staff member, then in OMB throughout President Clinton’s two terms, then at NYU, ultimately as provost. He then worked, as I said, for about 2 years for the dreaded Citigroup. For this he gets summed up as a “former hedge fund manager who also worked with Citigroup,” “yet another Wall Street alumnus,” “terrible appointments like this one,” “Wall Street hacks,” and “a hall of fame deficit hawk.” This is inaccurate, unfair, wrong, and a tactic I would have expected from the worst of the right wing, not from this direction.

So where is the common ground? Marshall Auerback moves the conversation toward the actual issues of the deficit and the economy by his appropriate emphasis on financial balances: “government expenditures cannot be treated as an isolated financial flow.” This is entirely correct (I would guess that everyone reading this far knows that financial flow analysis has been part of the canon for about 60 or 70 years), and is a good way of initiating the real topics: economic growth, financial risk, short term versus long term, budget restructuring, and real world tradeoffs.

I want to write a series of blogs on these topics and want to start now by commenting on the objectives of fiscal policy and on the short run versus the long run.

I’ll start by asserting that the objective is economic growth: growth with equity, growth with as few spectacular 2008-2009 financial crises and great recessions as possible, and growth with low inflation. Neither deficits nor surpluses should be ends in themselves. (I acknowledge that some do see one or the other as ends.)

This is one point at which financial flows enter the picture. Marshall Auerback is quite right to say that reducing the deficit cannot be done or seen as an isolated event, but in my view his reading of the balances is too limited and misses the heart of the policy issue.

First, I’ll skip all the interim steps and say, all other things being equal, Marshall Auerback is right that reducing the deficit will reduce economic growth — which seems to me to be about the last thing we need. So, given the state of our economy today, in the short term — say, the next two years — deficit reduction is not the right fiscal policy. But the Obama Administration isn’t advocating short term deficit reduction, quite the opposite. And the much maligned budget commission has zero chance of affecting the deficit any time in the next two years.

But, second, that is not the full story these balances tell. If one looks at the three balances — net private savings, foreign flows, and the government deficit — over the last 50 years, what stands out is that they have never been as out of alignment as they are today. These balances sum to zero, as they must by identity. But zero is reached today by the combination of 7.7% (of GDP) net private savings, 3.3% foreign capital inflows, and 10.9% total government deficit. This is not a stable combination. It suggests exactly the wrong kind of economy for our nation’s needs. It implies the growth of public debt at a rate about 3 1/2 times anything we can sustain. And it sets us up for the next disastrous crisis.

What this all says is that from the beginning of his presidency, President Obama has faced the necessity of pursuing a sophisticated, hard-to-explain macro-policy. In other writings, I have called this “the pivot”. First, he had to stimulate the economy, necessarily raising the deficit. Then, as soon as possible, he would have to pivot and focus on long term sustainability, which — also necessarily — will require lowering the deficit over time. If we do not  pull this off as a society, we will see continued slow growth, high unemployment, and another financial crisis.

The Obama economic team knows the substance of all of this, but perhaps misjudged how difficult this was as a policy. The difficulties of doing this, of explaining this, of winning the narrative battle, and fighting the deliberate misinterpretations from the Republican side are why I have felt that the Obama Administration erred strategically by not focusing almost entirely — there were, after all, two wars — on this issue. White Houses have limited capacity and have to focus in order to communicate anything intelligible. But this problem goes way beyond simply communication. This economic issue will be at the center of the Obama Presidency throughout his time in office. If the issue isn’t focused on, and solved, this presidency will not be successful.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team.