John’s post yesterday about the mysteries of bank bailouts prompts me to put down in pixels my political field theory of the cycle of political inflection points between 2008 and today. Like John I don’t claim to understand the ins-and-out of the global financial system, and don’t know whether the government had to backstop the banking system to the huge extent it did in the panic of September 2008. It seems to me there is an argument that the panic of 1907—solved quickly without a Federal Reserve or a massive government hand in the matter—might offer a better model. But it is entirely plausible that one of the heeded lessons of the Great Depression is that a collapse of the banking system and contraction of the money supply turns a panic and banking crisis into a catastrophe. We can put off this argument/seminar for another time.
But there was one clear effect of the “shock and awe” $500 billion TARP bailout, which passed Congress in haste and without extended deliberation: it sent a signal to liberals that it was possible to borrow and spend much larger amounts of money than ever thought possible. So after the election, Obama and the new, hitherto spending-deprived Democratic Congress (which had been out of power for most of the previous decade), presented with “a crisis too good to waste,” blew out all the doors with the $900 billion “stimulus,” which, as has been pointed out, had as much to do with politics—servicing liberal interest groups—as it did reviving the economy. And then added Obamacare, another trillion-dollar entitlement, on top of it.
Now that they are in political trouble, Democrats may wail about the lack of Republican compromise in either the stimulus or Obamacare, but I think Democrats were actually pleased to pass both on party-line votes. Remember—they thought Obama was FDR II, and that the stimulus and Obamacare were New Deal II. (They’re partly right: just as the New Deal didn’t work to end the Great Depression, the stimulus didn’t work to revive our economy. Shovel-ready and “green jobs” (or “green jobs for janitors” as my smart environmentalist friends like to observe) were the economic policy equivalent of paying farmers to destroy crops back in the 1930s when people were going hungry—a measure that destroyed capital and rewarded unproductive activity). They thought their program would be politically popular and add to their political strength. They couldn’t believe it when what happened was the Tea Party.
In other words, a terrible threshold was crossed with the panic of 2008. A historical inflection point was reached. The last vestiges of any spending restraint among Democrats were gone, not unlike how the Great Depression blew out the last vestiges of constitutional limits on government control of the economy at the Supreme Court in 1937. The point is—no TARP, then no $900 billion stimulus. It just wouldn’t have flown politically. As it was, Democrats badly underestimated how shocked the American public was by this whole scene, which is why they could not fathom the rise of the Tea Party: it had to be a contrivance of the Koch brothers because, as every liberal knows, the people like us, they really like us!
But that’s not the end of the story. The aforementioned Tea Party arrived, and largely shaped the political outcome of the 2010 mid-term election, which Democrats had hoped (and a few timorous Republicans feared after November 2008) would be a re-run of 1934, when voters rewarded FDR’s Democrats for their big government boldness.
So cast your mind back to the lame duck session last fall, where Obama quickly capitulated on extending the Bush tax cuts, much to the disgust of his left wing base. What the lame duck Democratic Congress didn’t do then is more significant: it didn’t raise the debt ceiling, even though it had the votes to do so. Obama and Geithner both said at the time they wanted the new Congress to deal with it, though both then and later they said they wanted a “clean” debt ceiling increase—that is, with no strings attached. Obama himself dismissed some press questions about whether the new Republican Congress would seek to attach conditions.
Why did Obama and his political team take this course, which in retrospect was an obvious blunder? A very savvy beyond-the-Beltway friend who has followed fiscal politics for years suggested to me last week that Obama thought he could use the debt ceiling issue in much the same way Bill Clinton used the budget standoff and government shutdown of 1995-96 to revive his political fortunes. Obama thought he could break the Tea Party with the debt ceiling issue. After all, Republicans would have to cave on the debt ceiling, wouldn’t they? And if they caved on this, the Tea Party would implode, the GOP leadership would be discredited within its own ranks, and Obama would be on his way to an easy re-election next year.
Except it didn’t happen this way. The GOP stuck to its guns. The deal struck last month was far from perfect, but it didn’t break the Tea Party or the GOP congressional leadership. And although Congress and the Tea Party have taken their hits in terms of public opinion, Obama got much the worse of the deal.
But more important that the details of the debt ceiling deal, about which reasonable Tea Partiers and other conservatives can disagree, is the political effect of the debt ceiling showdown. I think it represents the second inflection point of this long cycle of economic misery. Never again is a debt ceiling increase likely to pass Congress routinely or without a fight to attach some kind of conditions or spending concessions. Even if Obama is re-elected in 2012, when the debt ceiling comes up again in 2013, there will be another big fight over it.
I think the debt ceiling debate this year has done for future debt ceiling thresholds what the Bork nomination did for judicial politics in 1987—changed the political rules of the game forever. The new shape of this debate doesn’t guarantee success for our side, but it has shifted the ground of the debate fundamentally to our home field advantage, at least so long as we have trillion-dollar deficits as far as the eye can see. There will be ups and downs for the cause of spending restraint; we already saw that with the continuing resolution debacle of last April. But on average it will likely be worse for spenders. Have fun, Democrats.