Robert Kuttner

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.

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.

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.

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.

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.

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 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.

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.

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.

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.

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.

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).

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.

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.

Snatching Defeat out of the Jaws of Victory

When it comes to setting up Democrats to give away Social Security and Medicare, the Bowles-Simpson Commission is the diabolical gift that keeps on giving. Long officially defunct, the B-S Commission is a zombie that just won't die. The Gang of Six is the commission's spawn -- same kind of proposal, same needless sacrifice of Social Security and Medicare.

It's sickening that President Obama says he is heartened and energized by the new Gang of Six plan to cut $4 trillion from the ten-year projected deficits, using both steep cuts in Medicare and Social Security, plus tax cuts, as well as near-term budget cuts that will worsen the recession and neuter the government's capacity for recovery investment.