The Grand Bargain that Obama and Boehner reached general agreement on in July 2011 would have inflicted austerity on the U.S. and begun to unravel the safety net. It would have made extremely large cuts in social programs, including major cuts to the safety net. It would have produced modest increased tax revenues from wealthy Americans. Austerity, as was the case in Europe, would have thrown the nation back into a recession. Unemployment, which was 9.1% in July 2011, would have risen to over 10% and would have been rising throughout 2012 as we went into the election. Because social programs would have been slashed by the deal the misery of this increasing unemployment would have been compounded. Obama would have suffered a crushing defeat, the Democrats would have lost their majority in the Senate, and the Republicans would have achieved major gains in the House and in state races.All entirely possible. The fact that the economy has seen some steady improvement instead doesn't mean at all that such a deal makes economic sense right now, apart from the damage from cutting benefits on Social Security, Medicare and Medicaid which would likely last for generations.
We still have an economy operating far below capacity with high unemployment and interest rates up against the zero lower bound. Austerity economics is a suicidal approach in such a situation.
As Black notes, the "fiscal cliff" farce that is not something that came reasonably be said to have been forced on Obama by the obstructionist Republicans. He was playing his own game in pursuit of his postpartisan dream of a Grand Bargain to cut benefits on Social Security, Medicare and Medicaid:
Obama had the great luck that House Tea Party fanatics ultimately caused Boehner not to consummate the Faustian bargain.Black also notices what several other have, that the very people who promote austerity as expansionary and virtuous and urgently necessary are also fearmongering about what harm the "fiscal cliff" would do - because it's an austerity program! Black:
But Obama, [Timothy] Geithner, and [Bill] Daley were not content to have the Tea Party snatch defeat from the jaws of a Republican political victory that would have doomed Obama politically by doing horrific damage to our nation. When it was clear that the Great Betrayal and austerity would fail Obama successfully sought from Boehner an agreement to create a "trigger" that would impose austerity should the parties fail to agree to an austerity deal. This led to the creation of what the media now (inaccurately) calls the "fiscal cliff."
The fiscal cliff is an austerity program (but not a betrayal of the safety net).
The Beltway crowd is telling us we must avoid the austerity-induced recession the “fiscal cliff” is purportedly about to cause. The fact that Obama and Boehner tried to impose even more self-destructive austerity in July 2011 is ignored. The fact that Obama and Boehner insisted on the trigger that produced the so-called fiscal cliff is ignored. Given the belated understanding of the Beltway that austerity would be disastrous two obvious questions arise.Paul Krugman on the same point (Squirming Hawks 11/11/2012):
- Why are Obama, Boehner, and the media treating the July 2011 effort to commit the Great Betrayal not as a cautionary tale of the idiocy of austerity but as a tragic tale of bipartisan bickering in which austerity is the path of righteousness and courage?
- Why are Obama, Boehner, and the media treating it as obvious that we must act immediately to prevent the austerity of the so-called fiscal cliff by imposing greater austerity and unraveling the safety net through the Great Betrayal?
Incoherent is an inadequate word to describe the logic behind the administration's renewed effort to throw the nation into recession, increase unemployment, greatly increase misery by cutting vital social programs, betray the safety net, increase the deficit, and cause devastating losses to the Democratic Party in the next two elections.
The fiscal cliff poses an interesting problem for self-styled deficit hawks. They’ve been going on and on about how the deficit is a terrible thing; now they’re confronted with the possibility of a large reduction in the deficit, and have to find a way to say that this is a bad thing.Mark Thoma elaborates on Krugman's point in Hasn't Paul Krugman Heard about the Magic of Tax Cuts and Supply-Side Economics? No, and for Good Reason... Economist's View 11/11/2012:
And so what you see, in reports like this one from the Committee for a Responsible Federal Budget — is a lot of squirming.
Now, there’s a straightforward argument for why the fiscal cliff is bad but long-term deficit reduction is good — namely, that you really don’t want to cut deficits when the economy is depressed and you’re in a liquidity trap, so that monetary expansion can’t offset fiscal contraction. As Keynes said, the boom, not the slump, is the time for austerity. But the deficit hawks can’t make that argument, because they have in fact been arguing for austerity now now now.
I guess Paul Krugman hasn't heard about the magic of tax cuts and supply-side economics. Well, Cato-at-Liberty has, and it's ticked at the CBO because "it assumes higher tax rates generate more money" when making budget projections. That's right, despite all the evidence against the claim that tax cuts actually increased revenue -- it's a myth that won't die because people who know better, or ought to, still promote it -- we should discredit the CBO for making the claim that higher tax rates would help with the budget problem.Tags: austerity economics, fiscal cliff, grand bargain, medicaid, medicare, social security
And that's not all. The CBO should be further discredited [according to Cato] because it says the stimulus package helped to ease the recession:
The CBO repeatedly claimed that Obama's faux stimulus would boost growth. Heck, CBO even claimed Obama's spending binge was successful after the fact, even though it was followed by record levels of unemployment.I'll pass over the "record levels of unemployment' claim (but note that unemployment peaked at 10.0% in October 2009, but was 10.8% at the end of 1982, at best this is playing games with the word "levels" and ignoring population growth -- and if duration is the argument, as Reinhart and Rogoff recently noted, conditional on the type of recession this recovery is actually a bit better than most). On the main claim about fiscal policy, there's plenty of emerging evidence supporting the contention that fiscal policy helped to ease the recession (and remember how much of the stimulus package was tax cuts -- it's amusing to listen to conservatives tell us how useless the tax cuts they fought for as part of the stimulus package turned out to be, especially when in the next breath they argue for more tax cuts). The CBO is dealing in actual evidence, the claims made by Cato-at-Liberty are backed by nothing more than the Republican noise machine that is so good at misleading followers.
Republicans just can't help themselves from attacking anyone and anything that is inconvenient to their goals, and actual evidence has little to do with it. Apparently, they learned nothing from the election. This is part of a larger effort to discredit the CBO because it doesn't agree with Republican views on the magic of tax cuts, and for other results the non-partisan agency has come up with that Republicans don't want to hear (so they basically cover their ears and ignore them). [my emphasis]