POLITICS JULY 22, 2011
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I have to admit that I haven’t followed the ins and outs of the negotiations over raising debt ceiling. But, since they began, I haven’t seen a single proposal that wouldn’t do more harm than good to the country. And, from what I’ve read—from the original Biden proposals down to President Obama’s attempt to mollify the Tea Party—the plans have actually gotten worse, not better, as far as the country is concerned. What would I have the politicians do? Here are my guidelines:
1. There is no need whatsoever to cut spending now. We’re in an economic slump similar to the 1930s. If we cut spending and reduce the deficit, we will be reducing effective demand for goods and services. We will be prolonging the slump, and will end up increasing the deficit.
2. At some point, it will make sense to reduce the deficit due to the risk of inflation, higher interest rates, and the value of the dollar, but that will come when there is less idle capacity and unemployment. Budget cuts and tax increases should be triggered by reduction in the unemployment below, say, six or seven percent, not by an abstract calendar date.
3. In a slump, the only spending cuts and tax hikes that make sense are ones that would have the effect of transferring demand from less to more potent spenders. For instance, wealthy taxpayers are more likely to save than to spend their income and capital gains. If taxes were raised on them, and the revenue used to fund infrastructure or to give the less-wealthy a tax cut, that would benefit the economy. Similarly, if tax subsidies to overseas investment were transferred to the domestic economy. Nothing else makes any sense right now.
As far as I can tell, the proposals being weighed by our president and the speaker of the House violate all three of these guidelines. Yes, an agreement will prevent a government default, which could have catastrophic consequences, but the president and Democrats should be fighting for an agreement that won’t make a weak economy still weaker. If they have to compromise, it should be with this approach rather than with the weak tea that the president seems to favor.
John B. Judis is a senior editor of The New Republic and a visiting scholar at the Carnegie Endowment for International Peace.
5 comments
What the hell article is this? Yeah, Obama should some convince a bunch of insane teabaggers who are itching to default to be reasonable...sure, why didn't I think of that. And maybe afterwards Obama can go ride a pink unicorn over a chocolate rainbow.
- blackton
July 22, 2011 at 12:01pm
Well, if they're itching for a default, then let's lay the default at their doorstep and then deal with it. No sense enabling them by destroying the rest of the economy in a lame attempt to appease them, when they're not going to be appeased anyway. In Wisconsin, Scott Walker has implemented draconian policies. So now Wisconsin knows how serious the situation is, and can vote accordingly. Meanwhile, in the national realm, Obama keeps giving up things to prevent the Republicans from creating havoc -- but the Republicans create havoc anyway -- and then blame it on the President. At some point this needs to stop -- why not now?
- AllanL5
July 22, 2011 at 1:16pm
- I think John subscribes to the "As long as minorities force everyone to agree to nothing they close in on the date when a majority will support a clean bill." Since that is how it's always been done and there probably is only a majority who is only willing to not allow default, time is on his side. Plus, not saying no has only made him appear reasonable. See, he hasn't said no to any offer!? Yeah, he'll have plenty of time before the 2nd to sign a "Raise the damn debt" bill and that's all. Yeah, it'll be tough to prove that wasn't his goal (unless you take him at his word months ago...when all he asked for was a clean bill).
- michaelg
July 22, 2011 at 4:03pm
I disagree with the (apparent) liberal consensus on stimulus. I think the psychology of the markets right now indicate that a grand bargain would relieve massive anxiety about the country's direction. I think it's foolish to think that anything other than a literally fantastic amount of stimulus would help the economy much. The economy has deep structural problems that will take a while to work out.
- polcereal
July 22, 2011 at 4:37pm
Cross-posted (with modifications) from J Chait's blog: I agree with Judis in the sense that acceptable compromise deals should not completely abandon Democratic priorities--which also happen to be better for the economy. But given that any such real compromise is almost certainly unattainable in the face of Republican intransigence, the best option is to walk away, accept no debt limit raise and continue to issue debt and meet obligations either by invoking the 14th amendment or by enlisting the Fed to assist in a Treasury check cashing scheme a la roidubouloi. Many seem to be missing the larger point: what's at stake here is not just the medium-term health of the economy or Obama's reelection chances or the future of the Bush tax cuts but the enshrinement of the principle of government-by-extortion. Republicans, whose core agenda is essentially negative--no taxes, no social insurance, no regulation, no government of any kind other than the military--have figured out that they can achieve those ends even while holding majority control of only one half of one branch of government. Should Republicans' debt-ceiling blackmail be rewarded--and it is hard to imagine how an all-cuts, no revenue deal could be seen as anything other than a big fat suitcase full of ransom money--we should not merely fear a repeat performance the next time federal borrowing nears the debt ceiling, we should expect it. What will they demand next time? Some regressive tax monstrosity is a good bet. I wouldn't rule out a demand to completely renegotiate health reform either. The only play that isn't a total loss is for Democrats to tell Republicans to go fuck themselves. Obama should have done that the moment the debt-ceiling threat was issued: "I will not negotiate with extortionists. Do what every other Congress, Democratic and Republican, has done before you and send me a clean bill to raise the debt ceiling, and I will sign it. You know and I know that this is what is required to meet already existing obligations of the United States government, and that it has no relationship whatsoever to future spending. I hope that you will send me such a bill. It is within your power to do so. And if you fail to do so, I and my representatives will communicate with the American people every single day to remind them that it was Republicans who played politics with their livelihoods and threatened the future of the American economy." It's too bad that he didn't say something like that at the time, but it still isn't too late. Not that I'm holding my breath.
- AaronW
July 22, 2011 at 6:45pm