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The President Surrenders?
Nobel-Prize winning economist Paul Krugman isn't happy with the $2.4 trillion debt deal that just passed the US House. In his NYT's op-ed piece, he opines, The President Surrenders:
A deal to raise the federal debt ceiling is in the works. If it goes through, many commentators will declare that disaster was avoided. But they will be wrong.
For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.
Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.
The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.
Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.
And then there are the reported terms of the deal, which amount to an abject surrender on the part of the president. First, there will be big spending cuts, with no increase in revenue. Then a panel will make recommendations for further deficit reduction — and if these recommendations aren’t accepted, there will be more spending cuts.
Republicans will supposedly have an incentive to make concessions the next time around, because defense spending will be among the areas cut. But the G.O.P. has just demonstrated its willingness to risk financial collapse unless it gets everything its most extreme members want. Why expect it to be more reasonable in the next round?
In fact, Republicans will surely be emboldened by the way Mr. Obama keeps folding in the face of their threats. He surrendered last December, extending all the Bush tax cuts; he surrendered in the spring when they threatened to shut down the government; and he has now surrendered on a grand scale to raw extortion over the debt ceiling. Maybe it’s just me, but I see a pattern here.
Did the president have any alternative this time around? Yes.
First of all, he could and should have demanded an increase in the debt ceiling back in December. When asked why he didn’t, he replied that he was sure that Republicans would act responsibly. Great call.
And even now, the Obama administration could have resorted to legal maneuvering to sidestep the debt ceiling, using any of several options. In ordinary circumstances, this might have been an extreme step. But faced with the reality of what is happening, namely raw extortion on the part of a party that, after all, only controls one house of Congress, it would have been totally justifiable.
At the very least, Mr. Obama could have used the possibility of a legal end run to strengthen his bargaining position. Instead, however, he ruled all such options out from the beginning.
But wouldn’t taking a tough stance have worried markets? Probably not. In fact, if I were an investor I would be reassured, not dismayed, by a demonstration that the president is willing and able to stand up to blackmail on the part of right-wing extremists. Instead, he has chosen to demonstrate the opposite.
Make no mistake about it, what we’re witnessing here is a catastrophe on multiple levels.
It is, of course, a political catastrophe for Democrats, who just a few weeks ago seemed to have Republicans on the run over their plan to dismantle Medicare; now Mr. Obama has thrown all that away. And the damage isn’t over: there will be more choke points where Republicans can threaten to create a crisis unless the president surrenders, and they can now act with the confident expectation that he will.
In the long run, however, Democrats won’t be the only losers. What Republicans have just gotten away with calls our whole system of government into question. After all, how can American democracy work if whichever party is most prepared to be ruthless, to threaten the nation’s economic security, gets to dictate policy? And the answer is, maybe it can’t.
Love him or hate him, Krugman has a point. You can listen to him below speaking with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart." I also think this deal is a huge success for Republicans because there was no compromise: it's all about cuts in spending with no increase in taxes.
And Krugman is right, unemployment will get worse and so will the debt and deficit as more and more people enter the ranks of permanently unemployed. It's a disaster for the real economy but probably good for the stock market. I watched today's action and it played out like a perfect script. They sold the news, hedge funds and bank prop desks had their algorithmic trading computers working overtime, scooping up shares on the cheap, and by the end of the day, the stock market recovered all its losses.
And what about that ISM manufacturing report? Everyone made a huge stink about it dropping to a lower-than-expected 50.9. I say big deal, it's still over the critical threshold of 50, which signals expansion in manufacturing activity. Analysts want to paint doom and gloom everywhere but I think people need to take a step back and analyze economic data more carefully. The ISM report wasn't as bad as the bears made it out to be.
Finally, President Obama caved in to the Republicans, pissing off extreme left-wing and right-wing factions. He probably did not want to take a chance that a US debt default would take place under his watch. I don't blame him but now he and Congress have more pressing issues to deal with, namely, the jobs crisis. Unless that is dealt with forcefully, this deal will come back to haunt them.
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That is awesome. Very disturbing, but awesome.
There will be a $32 billion cut in the 2012 budget out of a $3.8 trillion budget and that is a severe cut in spending? That is less than a 1% cut
Leo,
Krugman is a hack. Read his blog. He posts 3-4 times a day. Read it for a week or two. There is only one conclusion one could reach. The guy is out of his fucking mind.
You say:
And what about that ISM manufacturing report? Everyone made a hug stink about it dropping to a lower-than-expected 50.9.
Do you have to get hit in the face with a two X four to get the message? The things that have been tried that you and Krugman love so much have not done a damn thing. And all that you and Krugman want is more of the same.
Sorry pal. Your way failed. Big Time. Time for someone else to lead the horse. Move over.
Thoughts on the viable alternative?
(David Frum on the new right)
http://edition.cnn.com/2011/OPINION/08/01/frum.debt.republicans/index.html
I believe mr. Frum would lump many in with the "student radicals". Is this where you *really* want to go? Historians would note how crises have spectacularly turned to the worse when people of general good character choose political radicalism as the solution for their economic problems.
By the main stream ceding to the radical right means we are all closer to the political abyss, not just a mere frightening balance sheet. There are fewer choices today than a decade ago, but chose the path that *may* cause catastrophe not *will* cause catastrophe.
It looks to me like Krugman is setting up a series of future columns with this one. The future columns would be about the strawman of "how I told you the Republicans caused this mess to get worse"....which, of course, we know is going to get worse anyway because of the lousy fiscal and monetary policies of government in general
When in doubt, deflect the blame. He is using this moment to define the deflection point.
I agree 100%. This is typical for Krugman. QE will save us. Oh, QE failed because it wasn't big enough. He deserves a Nobel Prize in excuses.
Exactly , everyone with a brain knows that government layoffs will create a bout of the economy decelerating but, we all need to face it It's going to happen government jobs are like handouts they aren't as productive and they a bearocratic and don't have any market discipline, he talks about japans lost decade well He needs to look no farther then his mentor to see that the policies he's advocating caused the lost decade in japan...We need a bout of deflation the companies that are loaded to the hilt with cash are waiting on the deflation to come so they can buy up smaller companies on the cheap at least that's what I would be waiting for if I was a CEO fuck hireing people in a inflationary input cost push enviroment like this wait until the input costs get cheaper then higher...If we get a stimulus again It's going to further shake the private sector out of not being able to absorb the outgoing public sector...what's bad about public sector jobs is they give people security and benefits for a 5-10 year period of time and then the government over does it because they don't have to care about wages, costs, any form of economic calculation....no budget in 2 years NUFF SAID....It's a hangover that everyone is going to feel but that's what happens when you invest your future into a curropt cartel they get BUSTED! I just hope your wrong but It does look like this arrogant little prick is going to spin this Bad and the general population is going run to him like a bunch of little lemmings and rally against the republicans and the great shift swings to the greater of 2 evils again for obamas election....talk about predictable you nailed it man....
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You even get comments when you say nothing ... Go Bruce
Anything Krugman characterizes as 'catastrophe', I welcome.
With every article, Leo shows himself to be more and more the tool of the status-quo. Krugman has a point? Krugman is clueless.
I'm not all that crazy about Karl Denninger's style, but he knows how to crunch numbers and see the devil in the details. Here's some reading material Leo, it's easy reading, brief and to the point.
http://market-ticker.org/akcs-www?post=191135
Stop playing confirmation bias and take off the ideological blinders.
One of your worst op-eds yet Leo. I support you posting here but do you have to return the favor by even mentioning Krugman's name? And in a serious tone at that.
If you mention Krugman in your posts, then please tie his name to something that puts him in context, like "Barnum and Bailey" or "Economic Freak Show Attraction".
Thanks.
Wow, a lot of junking here. For the record it's not me being junked that I'm addressing. It's that it appears that at least ten people disagree with my support of Leo posting here.
Why? Do we want a herd behavior here too? WTF are you afraid of? His ideas are Keneysian Krap. You know that. So what are you afraid of. Let him post then defeat his arguments.
Sunshine sanitizes. This is not MSM. Good arguments will outsell bad bad arguments in the market place of ideas.
Second that context req!
'Tiny penised'. 'Dog bothering'. 'Known to consort with farm animals'. I like those better.
And have you ever come out and confirmed that they're not true? No, you haven't, Krugman. Don't whine that I just made them up whilst drunk and angry. You have a Nobel prize and could make a spreadsheet to predict my behaviour. Several other economists have been forced to.
There's no spending cuts. If the government plans to spend $100 dollars in 2020 and then a bunch of Congressmen decide that the Congressmen in 2020 should only spend $90, they can say they cut spending by $10! But since they can't bind a future Congress, why not cut spending to $0? Then they could project a $4 trillion surplus.
You're going a bit off topic here.
Those future spending cuts are there to blame the future Tzars if they can't deliver what the current Tzars can't deliver.
There most definitely will be a QE3 after this debacle, you can count on it.
Yes, but will there be a QE4?
Maybe it's not the right kind of question....
What I mean is, when in 2012 will QE4 be launched.