If we judge by outcomes, then the Tea Party is now leading this country. The fact that it is leading us under-water is apparently of less interest to the president then his various governance “victories.”If you look up Pyrrhic Victory in the dictionary, there is a picture of Obama. We not only have no policy to prevent catastrophic climate change, our “leaders” have stopped talking about the problem and the House is trying to stop anyone from even planning for it.And what is our economic “policy” in the uber-slow recovery from the greatest economic downturn since the Great Depression? Under Obama’s “leadership,” we have become so obsessed with the national debt that we are actually willing to 1) undermine near-term growth by a spending-cuts-only debt-reduction strategy and 2) undermine long-term growth by enshrining caps on crucial investment programs, including clean energy.The NY Times story on the deal opens:
The nation’s political leaders agreed on Sunday to spend and invest less money in the American economy, a step that economists said risks the reversal of a faltering recovery, in the hope of improving the nation’s long-term prosperity.
Economist's View: Contemplating the Futility
Contemplating the Futility, by Tim Duy: I think many are in a contemplative mood this evening, seeing that after all the drama of the past month, it looks like the Democrats, with the full faith and leadership of President Obama, will cave almost completely to the Republicans. We could have done this weeks ago. On the Democratic side of the aisle, some might hope the White House can retain some leverage regarding the timing of the next debt ceiling vote and the expiration of the Bush tax cuts, but given President Obama's lack of negotiating skill, this is the very thinnest of hope. On the Republican side of the aisle, I imagine the the relief is joyous - imagine, holding the economy hostage and walking away the victors! Just a day after looking set to tear each other apart, no less. Four thoughts come to mind:
The debt-ceiling has been proven to be a very effective weapon, simply because there exists a non-trivial contingent of Republicans willing to push the button, but not a single Democrat. With that dynamic, the Republican goal of dismantling the social safety net looks achievable. They only need to chip away at it one debt ceiling at a time.
Obama's attempt to stabilize the political system by moving to the center has failed utterly and completely. The problem for Democrats is that Obama's "center" keeps moving to the right. Obama thought that as he co-opted Republican positions, such as Romney care, he would gain Republican support. Instead, he pushed the Republicans even farther right as the only way to differentiate themselves from Obama. Then Obama thinks he needs to meet in the new "middle" - and hence we get a deficit deal with no revenue triggers, but only after a near-debacle that leaves the rest of the country, if not the world, shaking their heads. Will this episode bring sanity? No - expect the Republicans to move further right in the next debate.
Is it futile to vote Democratic? Seriously, it is obvious now that your vote will deliver the same policy outcomes should you choose Democratic or Republican - but by voting Republican (at least on a national level), you also get the satisfaction of being on the winning team.
Finally, it is utterly unbelievable that we are about to pursue an obviously contractionary policy course when the White House is held by a Democrat and in the wake of a GDP report that vividly illustrates the weakness of the economic recovery. Yet here we are. Team Obama must believe that deficit reduction worked in the 1990's, and thus should work now. Would a Republican president have seen the unemployment rate and the pace of growth and thought the odds of reelection where greater with a debt ceiling plan that couples long-term cuts with near term stimulus?
Deep Gap between Washington and America
If there is a single common denominator to this long-winding debate, it is the gradual and steady shift away from the pressing issues of U.S. secular stagnation and unemployment to the issues of deficit cutting and austerity. In the foreseeable future, this shift will deepen the already deep economic polarization in America. Today, income inequality in the United States is already about the same or higher as in Iran, Venezuela and Nicaragua – and some 30-40 percent higher than in Europe in average, as measured by the Gini coefficient.
Politically, the debate has only contributed to the polarization between and among the two dominant parties. There is a deepening gap between traditional Republicans and the ultra-conservatives of the Tea Party group and other fringe elements. There is also a deepening gap between middle-of-the-road Democrats and center-to-left liberal Democrats. America’s 2011 deficit debate has been less about solutions to economic realities than about positioning to the impending 2012 election.
Washington’s shift from the issues of secular stagnation and unemployment to deficit-cutting and austerity does not reflect the views and preferences of ordinary Americans. Only 7% of Americans believe that budget deficit/national debt is the most important problem facing America today, according to the recent CBS News/New York Times poll. In contrast, some 53% of Americans believe that economy/jobs are the nation’s priority today.
In fact, a whopping 79% of Americans are dissatisfied with the direction of the nation, according to Pew Research. It is only seldom in the U.S. history that the gap between Washington and the Main Street has been as deep. Concurrently, the revised GDP figures indicate that the U.S. economy is barely breathing, growing only 1.3% in the second quarter (and barely 0.4% in the first quarter).
Washington’s deficit deal is a compromise of compromises. Politically, it does not reflect a bipartisan consensus but deepening polarization that will make such consensus even more elusive in the foreseeable future. Economically, it will do nothing to resolve the pressing issues of secular stagnation and unemployment in America; over time, it is likely to prolong both.
The debt ceiling deal: Nuts and bolts | The Economist
In fact, the absence of any tax increases makes it clear that this deal, whatever the misgivings of some in the tea party, is a Republican victory. This is the third time since last autumn’s midterm elections that Republicans have succeeded in pushing Mr Obama to the brink and extracting a deal more favourable to them than to him: first, the two-year extension of all the Bush tax cuts last December weeks before they were due to expire; then steep cuts to this year’s budget just as the government was on the verge of shutting down in April; now this deal. It is true that the congressional committee could propose both spending cuts and tax increases. That is clearly the hope of Mr Obama who said, in endorsing it on July 31st, “I’ll continue to make a detailed case to these lawmakers about why I believe a balanced approach is necessary to finish the job.”
But if the committee deadlocks or their proposal is defeated, the default option of sweeping spending cuts is more painful to Democrats than to Republicans, who generally consider defence cuts a lesser evil than higher taxes. Mr Obama has one card left up his sleeve: he plans to campaign for re-election on a commitment to ensuring the rich pay more taxes when Mr Bush’s tax cuts expire at the end of 2012. Such a move would raises taxes not just on the rich, the constituency Mr Obama wants to bear most of the burden, but also the middle class whom he has promised to protect.
If Republicans are the clear winner from this deal, the economy is the loser. An ideal deficit-reduction package would have coupled near-term stimulus with long-term consolidation that stabilised then reduced the debt as a share of GDP. This deal certainly doesn’t do the first and it’s unclear that it will do the second. True, it does not add significant new fiscal tightening: total discretionary spending would be a mere $7 billion lower in fiscal 2012 and $3 billion in fiscal 2013 than current levels, according to a Democratic Senate fact sheet. On the other hand fiscal policy is already set to tighten automatically; the International Monetary Fund estimates by the equivalent of 1.4% of GDP. Mr Obama had hoped to extend the payroll tax cut as part of the deal. He may yet do so during the Congressional negotiations, but that seems a fading prospect. It is striking that last Friday’s appallingly weak GDP data did nothing to shape the deal any further in the direction of near-term stimulus.
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