I wrote at the end of the liveblog on Obama’s speech today that, but for the fact that the speech should never have been given, I didn’t have much wrong with it. Obama got suckered into making a big show of his deficit reduction bona fides at a time when the biggest problem in the country concern millions of idle bodies who could be working and contributing. The weakest part of the speech was his rebuttal to this concern, where he says he basically agrees, he gave everyone a payroll tax cut (which doesn’t do a heck of a lot for people not on a payroll), and an evidence-free assertion that “doing nothing on the deficit is just not an option.” But it’s actually quite a good option.

At the moment the international investment class is prepared to lend money to the United States of America at low interest rates. What’s more, at the moment the United States of America has a lot of infrastructure needs. Furthermore, at the moment the United States of America has a large number of unemployed people. The logical course of action would be to accept international investors’ desire for us to increase our volume of low interest borrowing in order to put people to work on useful infrastructure projects. Near the end of his speech, Obama said that “doing nothing on the deficit is just not an option.” But it is an option! It’s not an option for Spain, which is facing sky-high borrowing costs. It’s not an option for Portugal, which just accepted a bailout from the European Union. But it is very much an option for the United States of America. It’s a good option, an appealing option, an option that will increase our wealth over the long term. It won’t be an option forever, but that’s all the more reason to exercise the option while we can.

Policies like this are just a missed opportunity, a chance to actually win the future with investments in the present that extend our economic performance. We could recover the half of the deficit created by falling tax receipts just by employing people. No deficit reduction works at 8.8% unemployment.

But this is Washington, and they’re consumed with deficit frenzy at the moment. The era of stimulus and investment is dead, to the extent that it was ever alive. So what did we get here?

Well, we got a lecture that started with a generally correct statement that the deficit problem was caused by tax cuts and wars overseas. Then there was a balanced set of proposals put forward to fix it. It wasn’t “end the tax cuts and the wars overseas,” though there was a nod to that early in the speech, a line that probably snuck in from an early draft. “If we had simply found a way to pay for tax cuts … deficit would currently be at low historical levels in the coming years.” That’s still true. In fact, most of the deficit problem goes away with the Bush tax cuts. The rest could go away simply by ending the wars and reducing defense to pre-Bush levels.

The President was extremely hard on the Republican budget introduced by Paul Ryan. He correctly said that there was nothing courageous about picking on the poor and rewarding the rich. He said that the plan would “end Medicare as we know it” and turn it into a voucher system, including the excellent line “their plan lowers the government’s health care bills by asking seniors and poor families to pay them instead.” He said that tax cuts for the rich were obscene.

But instead of the simple math equation I outlined earlier as a response, we got the complex one devised by the President today. It includes a raft of policies:

• $4 trillion in deficit reduction, with the creation of a new 12-year budget window that allows for less cutting than the usual 10 years.

• $800 billion in discretionary spending cuts, through the current five-year freeze and additional program cuts. I’d rate that extremely austere.

• $400 billion in security-related cuts, including defense and homeland security. So the ratio of domestic to defense cuts is 2:1.

• Increased powers for the Independent Payment Advisory Board to lower cost growth in Medicare to 0.5% above GDP, rather than 1%. The IPAB would be able to reduce payments and restructure Medicare to ensure they reach that target. In addition, the prescription drug industry would take a hit: Medicare would be allowed to bargain for cheaper prices, and biologic patents would be reduced from 12 years to 7. The formula from Medicaid would be changed in a way that cuts costs, but that’s fairly vague. Basically, this implements the cost-saving measures from the Affordable Care Act and piles on a few more, for a total of $480 billion in additional savings.

• There are $360 billion in additional cuts to mandatory spending, like “Ag subsidies, the federal pension insurance system, and anti-fraud measures.”

• One trillion in increased tax revenue, through letting the Bush tax cuts expire beyond the first $250,000 of income, and reducing tax expenditures. This could result in lowering rates, depending on the amount of expenditures eliminated. Also they want to cap itemized deductions.

• Social Security got a passing mention and it was verbatim from the State of the Union. The impression given was “Congress should deal with it, so… get back to me.”

So to get to $4 trillion, you have $3 trillion in spending cuts and what they’re calling “interest reductions,” on the theory that reducing the debt lowers the interest payments, and $1 trillion in tax revenue. This is considered a “balanced” solution.

slight update: If it’s true that tax expenditures are being counted as spending cuts, then the 3:1 ratio goes down significantly. I actually don’t mind that formulation as a rhetorical device, but it makes it harder to see what the balance is.

Here’s how Harry Reid responded, showing that the speech was marginally useful:

“The President’s responsible vision for reducing the deficit provides a clear contrast with Republicans’ reckless plan to end Medicare and Social Security. The President’s plan will reduce the deficit by more than $4 trillion while protecting seniors on Medicare, and it recognizes that Social Security should be dealt with separately. The Republican plan, on the other hand, uses the shared goal of reducing our deficit as an excuse for slashing seniors’ hard-earned benefits in order to pay for tax breaks for millionaires and billionaires.

“There’s been a lot of talk about shared sacrifice when it comes to cutting spending and reducing the deficit. Republicans believe the sacrifice should fall mainly on seniors and the middle class, while millionaires and big corporations get more tax breaks. As the President made clear, Democrats have a different view. We believe that the responsible approach is to make sure the wealthiest Americans contribute their fair share as we try to bring our fiscal situation back into balance.”

This rhetoric is all fine. And the rhetoric in the speech, with its defense of government action, was mostly fine too. But the direction of the debate is all wrong. We’re wasting human potential with a focus on deficits. It’s the wrong time and place. The speech is fine a) if you believe the lines in the sand will not be crossed and b) if you ignore the fact that millions of people are out of work.

UPDATE: Then there’s the point about this becoming the new baseline, the leftward pole in the debate, a point Paul Krugman makes here. That’s a dangerous step, and even worse is the silly “failsafe” which will mandate spending cuts and tax hikes if these deficit targets aren’t met by 2014. That’s essentially a spending cap, and it’s a terrible idea.