The Dangers of Our Budget-Deficit Minuet

 

The day after Barack Obama was re-elected, the Dow Jones lost 312.96 points. It wasn’t just that investors were hoping for the lower taxes and further deregulation that would have come with a Romney win. The news from Europe was bad, and pundits were obsessively focused on the “fiscal cliff” of mandatory budget cuts that will drive the economy into a new recession unless Congress jumps off its own budgetary cliff first.

For once, the markets are right. But the news from Europe entirely contradicts conventional assumptions about the fiscal cliff.

Greece, which has dutifully cut its budget as demanded by the leaders of the European Union and the European Central Bank, is deeper in depression than ever. The latest reports show that its economy has shrunk by more than 20 percent over four years and that the more that it cuts its deficit, the more its national debt grows.

How can that be? Budget cutting in a depression just deepens the depression. The deeper the depression, the less revenue the government takes in.

So if the United States does not want to “become like Greece,” cutting the deficit in a still-depressed economy is the wrong way to go.

The ravages of Hurricane Sandy, with rising oceans forecasted to worsen in coming years, suggests that we will need to spend hundreds of billions of dollars on rebuilding coastal infrastructure—a policy that will also create jobs and stimulate a recovery.

But the deficit-reduction minuet is proceeding as if Sandy never happened.

President Obama and House Speaker John Boehner are on track to cut a deal that Wall Street has been slavering over for a decade—a small dollop of revenue increases, mainly through loophole closings, coupled with massive spending cuts including in Social Security in Medicare, adding up to $4 trillion to $5 trillion of budget cuts over a decade.

Obama is convinced that this sort of grand bargain is necessary because financial markets expect it. Yet the same financial markets are happy to lend the government money for 30 years at less than 3 percent interest.

If Obama and the Republicans do make such a deal, growth will slow to a trickle.

Ironically, the president, having humiliated the Republicans on Election Day, holds most of the cards.

He can declare that he has no intention of cutting Social Security or Medicare and instead propose new must-pass infrastructure legislation. And he can insist that any budget deal needs to include higher taxes on the rich. (California Governor Jerry Brown just demonstrated that such a stance is good politics. The initiative that he sponsored and worked for, raising taxes on the rich to increase funding for California’s public schools, was approved by the voters.)

Time is on Obama’s side. On January 1, taxes increase on everybody, and automatic spending cuts of $1.2 billion kick in. He needs to set up the Republicans to take the blame because of their wildly unpopular conditions for a deal. Bill Clinton, who won a similar game of chicken with Newt Gingrich in 1996, can give Obama lessons in the art of the bluff.

Re-elected presidents often face a jinx in their second terms. The worst possible start for President Obama would be to agree to a deal that harms the economy and sells out the people who just re-elected him.

If there is one thing worse than a fiscal cliff, it is a fiscal cave. This is no time for Obama to cave into Republican and Wall Street pressure for a budget deal that will leave history to remember him as the Democrat who presided over eight years of a depressed economy.

Comments

Good point! There is no fiscal "cliff" in the sense that there was a possible (and thankfully AVOIDED, contrary to deniers) "cliff" on January 1, 2000 with the Y2K computer bug. The effects will begin gradually, and as long as the President makes it clear (perhaps weekly "fireside chats" leading up to the SOTU address) that THEY are responsible for allowing the deadline to pass, and continuing to stall after it passed, the GOP will be forced to cave, not the President and Democrats. Of course, to be credible, he will have to go through the motions of negotiating, but he must stick to the position of repealing the top bracket of the Bush tax cuts, but not the others, and keeping Medicare and Medicaid cuts to a minimum.

...keeping Medicare and Medicaid cuts nonexistent.

Obama's definition of compromise has always been, and probably always will be, that Republicans should give him whatever he wants. After the election results I don't expect we'll suddenly see him willing to bargain with John Boehner. Nor will he be much inclined to listen to the market. Obama's a big believer in my way or the highway.

This article cites the shrinking Greece economy is a reult spending cuts...that is simplistic and BS...the cuts are required because they can't afford to pay for the cut programs (and most of them are entitlemements)...the country is going bankrupt. The money they would be spending if they could would be monopoly money. The austerity measures they are taking is cutting the government entitlements and that is impact the masses. But they have to do this or they wouldn't get any cash infusion from the EU. Now, we are going to the same crossroads...we need to cut spending and take a little hurt now or let this spending continue unchecked and entitlements grow to to unsustainable levels, and we'll be in the place that Greece is in...we have no money to pay our bills and no one is willing to buy our debt unless we cut costs. Try to get the rationale right for what is happening in Europr. Greece spending more money won't get them out of trouble..their problem is they spent so much money that they have no money to spend.

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