Monday, August 8, 2011

Who’s More Afraid of the Bond Market?

“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”
That was James Carville venting in the early years of the Clinton administration. He was one of the Democrats who’d followed Bill Clinton to Washington with big ideas about comprehensive health care reform, saving the planet from CO2 emissions, a middle-class tax cut and substantial public investments in human capital. They’d all soon be shelving their grander egalitarian aspirations to keep interest rates, and thus the cost of servicing the public debt, from going through the roof.

In hindsight, bond-market intimidation may not look like such a bad thing. By the end of the Clinton presidency, we were trying to figure out what to do with a projected budget surplus and Clinton had discovered how to promote equality in less ambitious, but more efficient, ways. At the time, however, Carville’s frustration was shared by his boss. Having run on the idea of putting people, not bond holders, first, Clinton knew that he was making the best of a bad fiscal situation. He adapted by making liberalism leaner but smarter.  He profited politically because Republicans proved to be less adaptable to general discomfort with the level of public debt than he was.

Well, the bond market is rearing its ugly head once again, demanding that politicians subordinate the claims of voters, taxpayers and consumers of public services, to the claims of the federal government's senior creditors. It’s hard to argue with William Saletan’s assessment of where we stand:
“Our politicians, still catering to the right and left, are reacting to the downgrade by blaming each other. They aren't getting the message. The debate between higher taxes and deep entitlement cuts is over. Our creditors are going to make us do both.”
So Republican and Democratic politicians are going to have to figure out a way to be smarter conservatives and liberals, getting more ideological bang, as it were, for every public buck. It’s pretty clear that Republicans can make revenue increases go down easier with their conservative base by folding them into base-broadening and rate-lowering tax reform that reduces the net impact of government on private economic activity. What comparable sweetener can Democrats offer to make entitlement cuts palatable to doctrinaire liberals?  Higher tax revenues accompanied by a lower tax rates on well-off people and a discontinuation of tax expenditures to core Democratic constituencies is as bittersweet from a liberal as a conservative standpoint.  It doesn't seem nearly sweet enough to cut the bitter taste of reducing entitlement benefits to the liberal palate.

The huge difference between Obama's latest pronouncements and the budget he proposed in February shows that he's adapting his pitch to new budgetary realities with Clintonian aplomb. Yet he's offering a lot less ideological gratification to the Democratic Party's liberal base than Clinton did.


Lone Wolf said...

Obama has given up on liberalizing the center of the political spectrum. He's deliberalizing himself so as to plant himself in an increasingly illiberal center. That might be good or bad, depending on you point of view, but there's no denying that's happening. And there isn't much liberals can do about it just as there wasn't much they could do about Clinton's triangulations except get used to them.

Anonymous said...

All we can do is wonder who we voted for. Who was that man anyway and where did he go?