Media is highlighting selected parts of President Obama’s discussion yesterday at the jobs summit, saying that he insisted that government’s ability to help reverse joblessness through public investment was “limited”. Out of that line, traditional media has created headlines.

They could have just as easily created headlines with another facet of the President’s discussion yesterday, where he reversed a very troubling trend in the White House, this tendency to foreground deficit reduction as a major goal for 2010. This is from paragraphs 5 and 6 of that above-linked USA Today story:

He ruled out an immediate effort to reduce the $1.4 trillion budget deficit until the economy rebounds further and the 10.2% unemployment rate begins to decline. Focusing on the deficit too soon, he said, could risk a “double-dip recession.”

“If we move too abruptly in that direction and we’re not thinking about all the people out there who aren’t working and businesses who aren’t making money, then we’re going to be in a negative spiral that I think would be very destructive,” the president said.

That is absolutely correct, and it’s relieving to see the President move away from the near-term deficit hawkery that would be a disaster for the economy, which is only on life support right now because of deficit spending.

I actually highlighted this yesterday, but with the release of the transcript it’s worth repeating in full. Here’s the entire exchange in question. It’s worth repeating in full. Robert Kuttner of the Institute for America’s Future asked the question.

QUESTION: You know, most of the things that have been proposed today
cost money, and there is this concern about the federal deficit. I hope that your administration will recognize, as I know you will, that it’s possible, first of all, to reduce the deficit over time and sometimes in the short run realize that you need to increase the deficit. And I hope the concern about the deficit in the long run doesn’t crowd out
the need for additional spending in the short run. And I also think that some of these programs that increase jobs and increase GDP are probably the fastest way to get the economy back on a track that will reduce the deficit over time. It’s certainly a better way to reduce the deficit than putting ourselves into a — into a debtor’s prison and assume we can deflate our way to recovery.

OBAMA: Well, I think this is an important point. You know, we’ve been talking a lot about specific initiatives. There is a macroeconomic element to this whole thing. And so let me just amplify what was just said.

We have a structural deficit that is real and growing, apart from the financial crisis. We inherited it. We’re spending about 23 percent of GDP and we take in 18 percent of GDP and that gap is growing because health care costs, Medicare and Medicaid in particular, are growing. And we’ve got to do something about that.

You then layer on top of that the huge loss of tax revenue as a consequence of the financial crisis and the greater demands for unemployment insurance and so forth. That’s another layer. Probably the smallest layer is actually what we did in terms of the Recovery
Act. I mean, I think there’s a misperception out there that somehow the Recovery Act caused these deficits.

No, I mean, we had — we’ve got a 9-point-something trillion- dollar deficit, maybe a trillion dollars of it can be attributed to both the Recovery Act as well as the cleanup work that we had to do in terms of the banks. In turns out actually TARP, as wildly unpopular as it has been, has been much cheaper than any of us anticipated.

So that’s not what’s contributing to the deficit. We’ve got a long-term structural deficit that is primarily being driven by health care costs, and our long-term entitlement programs. All right? So that’s the baseline. Now, if we can’t grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who’ve got jobs are paying taxes and businesses that are making profits have taxes — are paying taxes. That’s the most important thing we can do.

We understand that in this administration. That’s not always the dialogue that’s going on out there in public and we’re going to have to do a better job of educating the public on that. The last thing we would want to do in the midst of what is a weak recovery is us to essentially take more money out of the system either by raising taxes or by drastically slashing spending. And frankly, because state and local governments generally don’t have the capacity to engage in deficit spending, some of that obligation falls on the
federal government.

Having said that, what is also true is that unless businesses and global capital markets have some sense that we’ve got a plan, medium and long term, to get the deficit down, it’s hard for us to be credible, and that also could be counterproductive. So we’ve got about
as difficult a economic play as is possible, which is to press the accelerator in terms of job growth, but then know when to apply the brakes in the out-years and do that credibly. And you know, we are trying to strike that balance, but we’re going to need help from all
of you who oftentimes are more credible than politicians in delivering that message.

Because we want to leverage whatever public dollars are spent, and we are under no illusion that somehow the federal government can spend its way out of this recession. But it is absolutely true that any of the ideas that have been — been mentioned here are still going to require some public dollars, and those are actually good investments
to make right now.

I’m sure some people will pick apart at this transcript, and I don’t agree with every word of it, but it’s clearly the absolute best the President has been on this subject, recognizing that job creation must come before any deficit reduction. Which is why I think you’ll see some actual job-creation measures released by the White House next week (hopefully they’re good ones).

There’s a well-coordinated and well-funded lobby of fiscal scolds that are in the ear of the entire city of Washington every single day to slash spending and cut the deficit, even though that would be the exact wrong thing to do at this stage. Obama is resisting their advice in this passage. That’s good news.

UPDATE: Just to emphasize, this is the level of economic ignorance in official Washington. Frank Ahrens is one of the top economics reporters at the Washington Post. This is from a live chat of his:

Q: Taxes are killing us.: The US at 26.1% pays less tax than any other industrialized country except Japan at 25.8%. Sweden is at 50.2%, the UK at 35.8%, and Spain at 35.5%, for example. BTW each of these three countries had higher growth (average per capita growth 1995 – 2005) than we did. 2.5%, 2.4% and 3.1% resp. compared to our 2.1%. Also Japan’s was 1% growth.

Frank Ahrens: But did you know our corporate tax rate is among the highest in the world? That makes a real difference if you’re a business and you’re thinking about locating in the U.S. or, say, India.


Q: But did you know our corporate tax rate is among the highest in the world?: Dead wrong. Our nominal tax rate of 35% is among the highest, but because of loopholes our real tax rate of 18% is among the lowest real corporate tax rates.

Frank Ahrens: Back atcha.

This is the default economic stupidity that must be difficult to take on in a city of corporate whores and know-nothings.

David Dayen

David Dayen