Welcome to the Tea Party's Austerity Recession
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It's not just the corporate media that's embraced the dubious narrative that deficits are hurting rather than helping the moribund economy. In his deficit address, Barack Obama said, “The greatest long-term threat to America's national security is America's debt.” Many Democrats in Congress – and even a plurality of “progressive” pundits – agree. That's the environment in which lawmakers cut a debt limit deal that, while not as bad as it might have been, will nonetheless drag down this fragile “recovery.”
In a typical piece of he said/she said reporting, the Washington Post told readers that “liberals” say that “the weak gross domestic product figures showed that massive government cutbacks were unwise, while conservatives said that lowering the budget deficit should be the priority.” But as economist Jared Bernstein noted,“the evidence easily supports the contention that government spending cutbacks have been a large drag on growth in recent quarters and have led to sharp losses in state and local employment. And while you can surely find some economist to support the "lowering the budget deficit" priority, the vast majority will tell you that fiscal contraction now or in the near future would slow growth.” And, he added, “they’re not be any means all liberals. CBO says so. Business investors/economists say so too.”
He's right. JP Morgan economists warned that "Consumer spending growth [is] at recession-like levels," and Mohammed El-Erian, CEO of the bond investment firm Pimco, told ABC News that if the deal is passed, “unemployment will be higher than it would have been otherwise, growth will be lower than it would be otherwise, and inequality will be worse than it would be otherwise.” He explained, “We have a very weak economy, so withdrawing more spending at this stage will make it even weaker.”
The ultimate irony in this madness is that the obsession with cutting spending will not only result in a lot of pain, but it also may make our long-term fiscal picture worse. The leading cause of the deficit to date is not the Bush tax cuts or our grinding wars overseas but the recession itself, and the huge drop in tax revenues it triggered. We should be running high deficits and spending that money to get people back to work; it's the responsible way out of a deficit when the economy has a ton of excess capacity: idle workers, plants and equipment. As economist Paul Krugman put it:
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.
But while interest rates are low, the brinkmanship surrounding the debt ceiling appears to be pushing them higher. Budget guru Stan Collender noted that “the interest rate the U.S. government has to pay has already increased by as much as 40 basis points compared with what it otherwise would be. This means higher federal borrowing costs and deficits, and overall higher interest rates on everything from car loans to mortgages to credit cards.” Higher interest rates also depress growth and hurt the labor market.
The Debt Limit Deal
It is for these reasons that, according to economist John Irons, the debt ceiling deal passed on Monday will further depress growth and cost our ailing economy somewhere around 325,000 jobs next year. As Lawrence Mishel, president of the Economic Policy Institute, put it to the Huffington Post , the "deal represents a consensus of policymakers to look the other way at America's persistent high unemployment.” Some analysts argue that it won't be too bad because the spending cuts are, for the most part, back-loaded to kick in after 2012 (among other reasons). That's largely true – the cuts next year will amount to around $30 billion in discretionary spending.