How Obama's Cave in to GOP Extremists Will Devastate the Economy

The deal Obama struck with GOP leaders last week will cost our moribund economy around 400,000 jobs. It was a tragic compromise with an unyielding ideological opposition, yet Obama hailed it as “historic,” prompting the Wall Street Journal's plutocratic editorial board to crow that the president has now “agreed to a pair of tax cut and spending deals that repudiate his core economic philosophy and his agenda of the last two years.” They painted it as proof that “Republicans in Washington have reversed the nation's fiscal debate.”

Then came the news today that Obama will introduce a long-term deficit reduction plan, which might include “reforming” (read: cutting) Medicare and Medicaid.

The reality is that slashing public spending while private consumer demand remains in a deep trough is tantamount to economic suicide – every business survey conducted in the past two years has found that business's biggest problem is a lack of customers. Cutting programs that put dollars into the pockets of the poor and jobless and adding to the number of unemployed Americans is the worst thing we can do.

One can argue that the pain that would have been inflicted by a complete shutdown of government would have been so great, and the likelihood of the GOP caucus blinking under relentless pressure from its Tea Party base so slight, that Obama was nonetheless justified in cutting the deal. But his failure to challenge the Right's economic mythology is both inexcusable, and a sign that the White House is not prepared for the next two major battles to come.

The White House reads the polls, and according to Pew research (PDF), four in 10 Americans “said that major cuts in spending this year would not have much of an effect on the job situation.” Another especially confused 18 percent said deep cuts would actually help create jobs.

But that's simply the result of a self-fulfilling prophesy: the administration has conceded the idea that focusing on deficit reduction in this economic climate is something other than insane. They've framed the debate as a choice between deep, “irresponsible” cuts the Tea Party wants to make with a hatchet and intelligent trims the administration would make with a scalpel – Democratic center-right technocracy versus the crazy-right Republican “revolution” inspired by Ayn Rand.

That doesn't portend well for the fights ahead. In the next month or so, Congress will have to raise the debt ceiling – the maximum amount of public debt the government can hold – or face a possible default on the government's obligations. And then Washington will turn to the 2012 budget battle.

Increasing the debt ceiling is usually a routine matter, and the consequences for failing to do so are potentially catastrophic – it would wreak havoc on the financial markets and send an already shaky recovery into a steep backslide. But Republicans are nevertheless expected to once again attach onerous conditions to the bill – holding the economy hostage in exchange for extremely painful cuts to social safety net programs and other, unrelated items on their ideological wish-list.

It will be the result of a Republican party having been emboldened by the administration’s past concessions. Robert Reichcompared it to handing over one's lunch money to a bully every day rather than confronting him in a bloody schoolyard fight: it may seem like the least painful approach in the short-term, but it's actually the very worst way to manage the situation.

What the administration should be doing appears clear, at least from the outside. Analysts agree that Obama needs a credible strategy for dealing with this form of extortion going forward. Matt Yglesias suggests a two-pronged approach. First, a “credible, repeated commitment not to surrender anything in exchange for getting congress to agree to the debt ceiling being increased.” Every serious person in Congress knows the ceiling must be raised, and therefore “there's nothing to bargain over.”