Robert Kuttner

Say It Ain't So, Joe

When Joe Nocera was promoted from The New York Times business section to an op-ed column of his own, I was ambivalent. On the one hand, this rather neo-liberal writer has been somewhat radicalized by the financial crisis. He had been doing good work in the business section, and it was good to have a relatively liberal writer expert in finance joining the lonely voice of Paul Krugman on the op-ed page. Nocera, seemingly, had come a long way since his days as a naive celebrant of the allegedly democratized investment economy, epitomized in a truly dreadful 1995 book whose subtitle says it all: "A Piece of the Action: How the Middle Class Joined the Moneyed Class." If only. On the other hand, several financial crises later, Nocera still has a neo-liberal soul. A few columns ago, Nocera wrote a piece reflecting on his four months as the Times ' newest regular on the op-ed page. "In the four months since I began writing an Op-Ed column, the thing that has most surprised me is how darned...

Bad Economic News: Will It Discredit Austerity Economics?

The Congressional Budget Office is out with a report that should give pause to sponsors of austerity economics and opponents of repealing the Bush tax cuts. The report , released today, is the CBO's semi-annual update of economic and budget conditions. Among key projections: "[T]he pace of the recovery has been slow, and the economy remains in a severe slump. Recent turmoil in financial markets in the United States and overseas threatens to prolong the slump." As a consequence, both projected unemployment and economic growth rates will be worse than previously forecast. Unemployment will still be well above 8 percent at the time of next year's election. Growth will be sluggish through 2012. The non-partisan experts at CBO warn, "Under current law, federal tax and spending policies will impose substantial restraint on the economy in 2013." In other words, in the short run the policies of cutting the budget will have exactly the opposite effect from the ones the sponsors intend. They...

She's In!

Elizabeth Warren is officially running for the Senate seat held by Scott Brown. There are several reasons to cheer this. For starters, she is the most compelling new progressive leader to come along in many a year. At a time with few genuine public figures who command admiration, Warren is one. She knows how to play inside politics brilliantly, but is also a figure of rare integrity on rallying the spirits of a grass roots progressive base. As chair of the Congressional Oversight Panel, Warren was the de facto leader of the loyal opposition to the Treasury and White House team advising Barack Obama on the financial crisis. Their view: do whatever it took to prop up the big banks, however rotten. Her view: do an honest assessment of their balance sheets, use bankruptcies where necessary, and come out the other side with strong, independent institutions. Their view has prolonged the recession. Hers would have jump-started a recovery. Despite crossing swords with Geithner for two years,...

Good News, Bad News on the Budget Deal

As progressives sift through the entrails of the budget deal, there is some guarded optimism on two grounds. First, despite claims by House Speaker John Boehner, it turns out tax increases, or other revenue enhancements such as loophole closings, would count towards the $1.5 trillion dollars in mandatory deficit reduction to which Congress and President Obama agreed. The details are mind-numbingly technical, but for fiscal masochists, the Center on Budget and Priorities has a good explanation . Also, the Bush tax cuts automatically expire at the end of 2012. So all Congress and the president have to do is . . . nothing, and $830 billion more in revenue pours into the Treasury’s coffers, presumably reducing the need for spending cuts dollar for dollar. Actually, that figure just counts the money from extending the cuts for the wealthiest two percent. Congress would have to act affirmatively in order to prevent tax increases from hitting the bottom 98 percent, which it would surely do...

The Economic Maginot Line

In the late 1920s, the French minister of war was one Andre Maginot, a World War I veteran with a handlebar mustache and a limp. M. Maginot, learning the lessons of the last war, had the idea that if France could just build an impregnable fortification on its eastern frontiers, Germany could never again invade it. So between 1930 and 1940, at a cost of 3 billion francs, France constructed the unfortunate Maginot Line. When Hitler decided to invade, his Wermacht simply went around it, via Luxembourg and Belgium. The Super-Committee created by the great deficit-reduction deal is the economic equivalent of a Maginot Line. It is required to defend and fortify the economy by coming up with at least $1.2 billion in budget cuts. If it fails to agree, then an automatic trigger mechanism kicks in, cutting $1.5 trillion. But like the Maginot Line, the committee is pointed in the wrong direction. Its laborious construction is a waste and a diversion. The real threat to the economy is coming from...

America on the Brink

The stakes of our leaders' surreal obsession with deficits just got a lot higher. The economy could tip from stagnation into a real depression. As it dawned on Wall Street that austerity would not in fact help the real economy, panic selling ensued. The swooning stock market, in turn, creates one more source of belt-tightening that pushes us closer to an abyss. As the value of savings and the earnings on investments plummet, consumers are even less likely to go out and by products. Businesses are even less likely to expand or to take on new employees. And so the whole downward slide feeds on itself. The imagined savings from deficit reduction will be more than wiped out by slower than projected growth, as this recent analysis from John McDermott from the blog Alphaville shows. If GDP growth is even half a percent lower less than the budget-cutters assumed, nearly all of the projected budget savings vanish. And the belt-tightening in the budget deal is very likely to push the economy...

Pretty Poor -- and All Too Standard

In the financial crisis, the signature of the credit-rating companies has been that they are a day late and a dollar short. In this case, $2 trillion. S&P made a $2 trillion error in the computations that were the basis of its rationale for downgrading Treasury securities. But that was petty cash compared to what credit-rating companies cost the world economy when they corruptly took money from issuers of subprime bonds to help them come up with a formula to justify a triple-A rating. The entire financial collapse is on the conscience of the credit-raters. If they had the most elementary competence, they would have known that a bond backed by junk had to be junk itself. So where do these guys get off downgrading the debt of the United States? And why do it after a deal was struck to avoid default rather than before? All during the period when Republicans were playing chicken with default, markets were unfazed. Serious people knew that, one way or another, the United States would...

The Markets' Verdict on the Debt Deal

Let's take a moment to recall the logic of the deficit hysteria and the related deal just signed by President Obama. The economy, supposedly, was mired in stagnation because of a lack of "confidence." That confidence gap, in turn, reflected anxiety about the escalating deficits and national debt. Deal with the debt, and businesses would invest; consumers would spend, and recovery would return. As some of us have been writing almost since the Obama administration began, that view of the crisis was always absurd. With Americans out of work, and out trillions of dollars in home equity, consumers weren't spending. Business was neither hiring nor investing. The deeper deficit reflected the reduced revenues of a deep recession, but government was laying off workers, too. Very low interest rates suggested that no serious person was worried about inflation -- the bigger worry was deflation. Well, now we have the grim proof. The very day Obama signed the deficit deal, the Dow lost 266 points...

On the Corner of 14th and Wall Street

A number of commentators have asked: Why did the president categorically reject recourse to the 14th Amendment to raise the debt ceiling, even as a bargaining chit, when that rejection forced Democrats to accept a deal mostly on Republican terms? The New York Times ' Joe Nocera writes : My own view is that Obama should have played the 14th Amendment card, using its language about "the validity of the public debt" to unilaterally raise the debt ceiling....Inexplicably, he chose instead a course of action that maximized the leverage of the Republican extremists." Well, let me explain the inexplicable. Obama, speaking a week before the final deal, said that his lawyers advised him that the 14th Amendment did not apply. In fact, a lot of very well-informed constitutional scholars say otherwise. But this is not the real story. The main reason Obama rejected taking the 14th was that his Wall Street cronies, from Chief of Staff Bill Daley and Treasury Secretary Tim Geithner on down, were...

Now, Back to the Economy

While Congress completes action on the deal to raise the debt ceiling in exchange for deep spending cuts, the economy is on the brink of a deeper recession. And by the time phase two of the deal approaches, between Thanksgiving and Christmas (whose great idea was that?), members of both parties could be singing a different song. In phase two, Congress must agree to even deeper cuts recommended by a super-committee, or automatic ten-year cuts will kick in. But as growth keeps slowing, the premise that a ten-year deficit-reduction deal will somehow restore economic confidence and produce recovery, always dubious, will be revealed as ludicrous. Instead of the advertised fight about the mix of tax increases versus deeper spending cuts, we could well have a very different debate about how to stimulate a faltering economy. Democrats will call for more public spending, and Republicans will demand deeper tax cuts -- but at least that debate has the virtue of acknowledging economic reality...

A Disgraceful Deal

The deal negotiated last night is a disaster politically and economically. The liberals who went all out to elect Barack Obama have been reacting with increasing dismay to the president's combination of center-right impulses and inept negotiating habits. The right plays hardball, is rewarded for its intransigence, creating incentives to play more hardball. Its success in this crucial round portends an even harder line when Congress has to take up Part II of the bargain. That construction is heads-I-win-tails-you-lose. As a precondition to the next increase in the debt ceiling, Congress either votes even deeper cuts or a "trigger" causes them to take effect automatically. Liberals are supposed to be cheered because the deal spares Social Security and Medicaid -- for now. But they will be on the chopping block before long. Tax increases are not part of this round, but not ruled out as part of the second stage of the negotiations; of course, there is no way Republicans will go along with...

The Joys of Fanaticism

In a just world, Speaker John Boehner's failure to get the votes for a Republican debt-ceiling plan that is already doomed to certain Senate defeat should put pressure on Republicans to compromise. But that doesn't seem likely. Boehner may yet find the votes for an even more conservative (and doomed) measure, and in any case, the House Republicans are as recalcitrant as ever on holding the economy hostage. Boehner may lose some personal prestige over the affair; he could even lose his job. Yet the broader Republican strategy of playing chicken with the economy seems to be having its intended effect of weakening President Obama. According to the most recent Pew poll, Obama now polls only one point ahead of a generic Republican challenger, down from the 11-point lead he had in May. Pew reports that "this shift is driven by a steep drop-off in support for Obama among independents." Among independents , 31 percent of those polled said they'd vote for Obama, down from 42 percent in May,...

Remember World War I

Like most American spectators watching this slow-motion train wreck of a budget disaster, I have assumed that at the last minute the damsel would be pulled off the track of the oncoming train. Somehow, the Republicans would appreciate the stakes, a compromise (albeit on sickeningly Republican terms) would be reached, and the nation would be spared the catastrophe of default -- a gratuitous deepening of an already dire economic mess. Now I am not so sure. In the last 48 hours, the Republicans have dug in even more, and Democrats are drawing the line at the Reid plan (which is already far too Republican). For those who think that a default won't happen because it is in nobody's interest, think back on World War I. It was in nobody's interest. Yet it destroyed Europe's common civilization and ushered in nearly a century of economic instability and war. World War I occurred because both sides dug in and assumed the other would have to blink first. But that was a miscalculation. Instead of...

Another Capitulation?

Uh-oh. Senate Majority Leader Harry Reid, who has previously functioned pretty well as a firebreak against President Obama's instincts to give away the store, now seems to be tottering toward a Republican deal. If that occurs, yet another leader would be rewarding Republican intransigence. Reportedly, Reid's deal, offered as the Democrats' last hope to ward off a default, would include about $2.7 trillion in spending cuts, roughly the amount of the increase in the debt ceiling, and no revenue increases, details to be spelled out later. But that is basically giving in completely to Republican terms . And there is no way to get cuts that large without serious reductions in Social Security, Medicare, and what's left of other domestic spending. Here's what Senator Chuck Schumer said on MSNBC: "Senator Reid is going to put forth an offer that meets the Democrats' main criteria, going past 2012, and the two Republican criteria -- enough cuts to equal the amount you raise the debt ceiling...

Let's Make an EU Deal

The EU's bailout deal for Greece was slightly more generous than expected -- $159 billion of refinancing, of which private bondholders, mainly banks, are expected to eat about 20 percent of the loss. However, rating agencies are arguing that this will be technically considered a default, triggering payments under credit-default swaps; and there is still the ticklish matter of persuading banks to "voluntarily" accept the loss. Still, given the divisions within Europe, the fragmentation of EU institutions, and the residual power of banks and their toxic inventions, it was no mean feat for Europe's leaders to take this first step. There is reason to hope that it will create the necessary firebreak, so that speculators do not continue to drive down the economic recovery hopes of Spain, Portugal, Ireland, and Italy by making bets that they will default. Would that our leaders, facing a totally contrived "debt crisis," do as well.

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