Congress Makes a Mockery of Obama's Call for More G-20 Stimulus (and Hands Germany Victory in Advance)

June 23, 2010 11:00 AM

When China decided last weekend to "relax" its dollar exchange rate policy, at least rhetorically, much drama-seeking media attention instead shifted to the next likeliest flashpoint at the coming G-20 Summit, namely the alleged transatlantic crisis over fiscal policies.

On this side, as expressed in his letter to the G-20 leaders, President Obama is "concerned by weak private-sector demand and continued heavy reliance on exports in countries with already large external surpluses"1 and clearly wants especially Germany to do more to stimulate domestic demand. On the other side, EU leaders in their June 17 European Council conclusions equally directly stated that "the G-20 should agree on a coordinated and differentiated exit strategy to ensure sustainable public finances,"2 indicating that fiscal austerity is more important to them than continued fiscal stimulus.

On the face of it, a potential conflict is arising between the Keynesian Obama administration concerned about preserving global economic growth and preventing the United States from again becoming the "global consumer of last resort" and austere Europeans bent on fiscal consolidation and reliance on external demand in the short term. This fight, however, will never really occur for the simple reason that the Obama administration has already lost.

First of all, Germany—having just emerged almost completely victorious from the internal EU deliberations about the future of the Stability and Growth Pact and accepted to bail out Greece and potentially other weak eurozone countries for up to $200 billion—will (appropriately) be in absolutely no mood to compromise on EU austerity and will have the backing not just of fellow eurozone members France and Italy but also of new and austere UK (and possibly Japanese) prime minister(s).3 President Obama will have close to zero support from the G-7 countries for a push for more fiscal stimulus.

Secondly, and often overlooked in the European debate, President Obama is losing the Keynesian battle for more stimulus at home in the US Congress and losing it badly. Pushing for more fiscal stimulus from the G-20 would in just a few months be revealed as a completely untenable, if not outright hypocritical, policy position for the American president.

America is itself—through congressional inaction—on the verge of reversing its domestic fiscal stimulus. Obama's American Recovery and Reinvestment Act (ARRA) stimulus package from last year will largely run out over the summer and, despite a solid Democratic majority, will not be renewed or extended by a US Congress increasingly concerned about record US federal fiscal deficits (just like the austere Germans). President Obama is losing the Keynesian stimulus fight even within his own party. This is likely the reason why America's leading Democratic Keynesian economists are so angry these days.4

Last week the US Senate (where Majority Leader Harry Reid is facing a strong reelection challenge in his home state of Nevada this year) failed to pass a budget amendment, thereby allowing unemployment benefits for 900,000 unemployed Americans to expire and forcing a 21 percent cut in Medicare reimbursements to doctors to be implemented.5 As such, not only is the US Congress not extending any US fiscal stimulus but it is also actively dismantling America's (no longer) "automatic fiscal stabilizers" in the form of unemployment benefits and government healthcare expenditure for the elderly. Through its inaction, the US Congress is in effect implementing far more draconian cuts in the relatively thin US social safety net than any EU country, barring perhaps Greece.

In addition, this week Democratic leadership in the US House of Representatives announced that they will not even try to pass a budget this year but instead seek to enforce spending limits that are lower than what the Obama administration has called for.6 Obama will therefore risk criticizing other G-20 leaders for their budget cuts without even any prospects for getting his own budget through Congress.

Then there are the Bush tax cuts, which the Obama administration itself has proposed to let expire for Americans earning over $250,000 by the end of this fiscal year on September 30, 2010. While letting these unnecessary and unsustainable tax breaks for the wealthiest Americans expire is surely a sensible and in many ways necessary policy, nonetheless in the short term it will act to offset any fiscal stimulus that President Obama is urging from his G-20 partners.

It is also important to note what is happening at the state and local government level in America, which accounts for the largest share of government employment and direct services provision and which already has "balanced budget amendments" in place, largely similar to what the German federal government will implement by 2016 and German states by 2020.

Here it is instructive to read the June 2010 Fiscal Survey of States, published jointly by the National Governors Association and the National Association of State Budget Officers.8 As a result of their existing balanced budget amendments, US states' general fund7 spending declined by about $30 billion from FY2008 to FY2009 and another $45 billion from FY2009 to FY2010, or a total of $75 billion during this US economic recession.

Recall that these declines in states' general fund expenditures occurred in the last two years despite the states' receiving and spending more than $120 billion in federal funds from the ARRA. In other words, without the ARRA, US state and local governments would have had to cut much more spending by now. As the US Congress seems increasingly unlikely to authorize any new federal funds for US state and local governments, the latter will likely have to balance their budgets in coming years without support from the federal government—and with sluggish state and local government revenues—which is likely to be very painful.

The National Conference of State Legislatures keeps track of proposed and enacted budget measures to achieve balance in FY2011, and it is a list that would make any fiscally austere German and IMF mission to Greece proud. The list includes next year's state-level cuts to the education system; state employee furloughs and layoffs; state employee pay freezes/cuts; cuts in healthcare; cuts in the criminal justice system; and across-the-board budget cuts, cuts in state aid to local governments, and parks and recreation cuts.

Without action from the US Congress this fiscal year to channel more federal money to the states, Herbert Hoover may in other words be back, but he is not arriving in US economic growth data from Europe but instead checking from US state capitols.

It would be a grave error, however, to mistake the current US congressional "inability" to take any tough decision and the resulting US "stumble into fiscal austerity" for a designed plan for long-term fiscal sustainability that America needs. It is not. Instead congressional dysfunction and haphazard inaction on all fiscal policy matters create the worst of all worlds for the Obama administration right now by both completely undercutting the credibility of any calls for more fiscal stimulus by America's G-20 partners in Europe as well as potentially undermining the United States's own economic recovery later this year.

Notes

1. See President Obama's letter, June 16, 2010.

2. See EU Council Conclusions, June 17, 2010.

3. See the new and austere UK Emergency Budget and the new Japanese Prime Minister Naoto Kan's recent comments that "Japan may collapse under a mountain of debt."

4. Look no further than Paul Krugman's blog.

5. See David Rogers, "Budget Crisis Freezes Senate," Politico, June 18, 2010.

6. See Jared Allen, "Dems won't pass budget in 2010," The Hill, June 22, 2010.

7. National Governors Association and the National Association of State Budget Officers, Fiscal Survey of States, June 2010, available at.

8. The "general fund" in US states' spending represented 41.7 percent of total spending. See Fiscal Survey of States, p. 1.

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Jacob Funk Kirkegaard Senior Research Staff

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