The Best Deal for the White House vs. the Best Deal for the Economy

A grand bargain might seem like smart politics for the administration, but if it hurts the economy, it'll come around and look like bad politics in 2012.

LARRYDOWNING/REUTERS

It's official: The debt ceiling negotiations are headed into overtime, as Republican leadership confirmed this morning that they are still miles apart from the White House on a big budget compromise that would raise the debt limit with $3 trillion to $4 trillion in savings. Meanwhile, the Senate is working on a last-ditch measure to avert default with smaller, but still significant, budget cuts.

The White House wants a grand bargain for three simple reasons that come down to one big reason: timing. A grand bargain could mean more stimulus now when the economy is weak, more cuts later when the economy is stronger, and less budget conflict next year as Obama runs for reelection.

The White House thinks a big deal is the best deal, but budget cuts today won't support the weak recovery. And bad economics makes for bad politics.

When Americans feel like the economy is working for them, they're more likely to approve of the politicians working for them. There are many ways to grade an economy. You can look at overall GDP growth, but nobody wakes up and thinks, "Wow, I'm really happy about quarterly export figures." Jobs are crucial , but even with 10 percent unemployment, 90 percent of the workforce has a job, which is much more than any candidate needs to get elected. It turns out that even more than unemployment, growth in real disposable income predicts success for the president's party, as political scientist Seth Masket demonstrated when he looked at midterm elections.

There are three reasons the White House should be afraid of this graph in 2012. First, real disposable income isn't growing. Wages are falling behind inflation, and there's little reason to think that cutting spending will change that picture. Second, as Washington reins in spending, total government jobs will continue to fall below the private sector. Government is supposed to be a crutch for the private sector, but it's becoming a hurdle for national employment. Third, multinational corporations, which are growing faster than the overall economy, have repeatedly warned that premature government tightening could "risk triggering another recession [that] would likely result in excessive unemployment." A grand bargain might seem like smart politics for the administration, but if it hurts the economy, it'll come around and look like bad politics in 2012.

As the public sector starts to work against the economy, the president will have to bank on those ever-elusive green shoots to create real disposable income growth. There is growing evidence that, like releasing a pinched garden hose, the housing market will eventually burst back. Consumer debt is healthier than at any time since the recession. Spending among families making more than $100,000 has really come back, and some of that spending can irrigate small business revenue.

The White House is working within two constraints: (1) the limited ability of government to fix a $14 trillion economy and (2) the limited ability of the president to get his way in divided government. Nobody said this was easy, but the president made it harder on himself by accepting the debt ceiling negotiations as an opportunity to cut a deal that could hurt unemployment and national income by reducing a key source of employment and national income: government spending. A grand bargain might seem like the best deal today, but the best politics is always a good economy.