I have been struggling to get to grips with what sequester strategies the players are playing. Jonathan Chait argues that Mr. Boehner has been boxed into a corner. He is committed to reform of the US’s safety net and retirement programmes, but has not come up with specific plans because they would be unpopular; he wants to force Mr. Obama to propose any cuts. I wonder, therefore, whether his plan for the sequester was to force Mr. Obama to make proposals for spending cuts without tax increases, on pain of having the sequester happen. If Obama complied, Mr. Boehner would have appeased both the Tea Party, whom he has promised significant deficit cuts, and defence hawks, who would welcome a modification of the sequester; Mr. Chait argues that these are his two key constituencies in Congress.
If I am right about Mr. Boehner’s strategy, and since Mr. Boehner was the first player to move in this particular game, we can move on to consider Mr. Obama’s response. It would appear at first glance that Mr. Boehner has played the same trick as Mr. Obama played at the start of the year, using the prospect of something that would occur automatically to force the other side to agree to the same thing in lesser degree. However, there is a significant difference. It is true that Mr. Obama did not want sharp tax increases, but he could count on the Republicans’ visceral anti-tax reaction to force some kind of deal. In the present case, while it is probably true that Mr. Obama would rather not see the sequester happen, he is not viscerally against it; indeed, I have argued before that he would probably like to see a degree of deficit reduction this year.
This means that Mr. Obama has not been imprisoned in an ideology: he has been free to think though a political strategy. And it seems likely, given that the plans that have so far been suggested by Mr. Obama and Democratic politicians contained tax increases that were obviously unacceptable to the Republicans, that Mr. Obama’s strategy is to call the Republicans’ bluff. In previous wrangles over government spending, the Republicans have come off worse in terms of public opinion. Congressional Republicans are presently hitting new lows in the polls, while Mr. Obama’s net approval rating remains higher than it was for most of his first term; in spite of Mr. Boehner’s lame attempts to paint the sequester as being Mr. Obama’s fault, it seems that the public are blaming the Republicans again. I wonder whether Mr. Obama’s plan is as follows: let the sequester happen; wait for stories about sacked teachers, benefit cuts for military personnel, and so on, to fill the airwaves; make sure the Republicans take the flak; then reach over the heads of Congress with a “compromise” plan that contains the kind of cuts that he would actually like to make. This is a pretty bold strategy, but it is also a good way to break out of the cage imposed by the automaticity of the sequester; from a longer-term perspective, a hard-line response to Republican fiscal blackmail could bring the problem to a head in a clash of public opinion that Mr. Obama might win.
Tim Duy points out that the Fed did say it would pay attention to the costs and benefits of QE in its statement when it set the labour-market criterion for the end of the programme. It seems that some FOMC members took this more seriously than the market realised, and that the question was not settled. Robin Harding argues that the fact that “many participants” were worried about the costs suggests that worries extend well beyond the usual hawks. However, I still do not see any evidence that the usual doves could become a minority. Bernanke’s testimony to Congress next week may make things clearer.
Some Fed officials have given speeches. Mr. Williams said that unemployment is unlikely to fall below 6.5% until H2 2015. He also said that the market should not take the beginning of “tapering” of purchases as a signal that they might be closer to stopping. Good luck with that, Mr. Williams — that is exactly how the market will take it, because that is what it will be. Mr. Bullard, in contrast, expected unemployment to fall below 6.5% by June 2014. Neither line was surprising — Mr. Williams is more doveish, Mr. Bullard more hawkish.
Bloomberg has an interesting article on the intellectual development of Mr. Abe (http://bloom.bg/UPxT64). This is a reminder that not all policy-makers’ views are set in stone. I tend to assume that they are, because 1) I think there is a strong relationship between personality and political affiliation, and between political affiliation and opinions and 2) parties (and indeed voters) choose politicians for what they stand for, not for their personal qualities, and therefore reward those who stand for something consistent — which might well be at the cost of intellectual openness. There are exceptions, however, like Mr. Kocherlakota’s change of mind on the costs and benefits of QE last year; Mr. Abe’s intellectual shift is another. It is a pity that the mind of our own Mr. Osborne appears to remain closed on the subject of fiscal policy.