Friday, January 04, 2013

State of the conflict over economic policy in the US

The lame-duck Congressional session fight over the contrived "fiscal cliff" crisis gives us a good look at what the fights over budget and fiscal policies is likely to be like for the next half year, if not the next four years.

The most dysfunctional part of the national government at the moment is the Republican-dominated House of Representatives. The Republican Party is factionalized, though not along moderate/conservative lines so much as factions committed to different religious trends, business lobbyists (especially the extractive industries) and to particular billionaires.

The lame-duck session really raises the question of whether John Boehner may not just be a bad leader. But the House Republicans have re-elected him, so he will continue to be the Speaker the next two years.

And we have a Democratic President committed to essentially conservative economic policies. And to a "Grand Bargain" to cut benefits on Social Security, Medicare and Medicaid. The combination of a Democratic President with conservative goals and questionable negotiating skills and a Republican Party committed to cutting Social Security, Medicare and Medicaid as part of their desire to return to Calvin Coolidge economics is an ugly one.

Eliot Spitzer talks with Vermont Sen. Bernie Sanders about the lessons of the recent negotiations and the concerns they raise for the coming Congressional session in this Current TV segment:

Sen. Bernie Sanders on the fiscal cliff deal: Obama 'should have applied more pressure' 01/02/2012:

Cenk Uygur reminds us that there were some bad provisions in the January 1 bill that Obama has now signed into law, including excessively favorable treatment for the One Percent on "carried interest," dividends and the estate tax. Carried interest is a big part of the income for hedge funds. Rep. Pete DeFazio: Biden is 'out of touch' on debt deal and 'tea party dominance' 01/02/2013:

Preventing cuts in benefits on Social Security, Medicare and Medicaid is going to be a continuing fight, certainly for the next six months. And it's a fight against the Republicans and against President Obama. Obama is not a friend of supporters of Social Security, Medicare and Medicaid on those issues. Up until almost the last moment, Obama was still trying to include cuts to Social Security benefits in the "fiscal cliff" deal. As we move into Debt Ceiling Crisis II, Social Security, Medicare and Medicaid will continue to be at immediate risk of benefit cuts.

Larry O'Donnell on MSNBC Thursday night was raving about how the "fiscal cliff" deal showed the brilliance of Obama's negotiating skills and his dedication to the needs of the unemployed. But I don't see it. My relief at the final result was due to the fact that the final result didn't include benefit cuts on Social Security, Medicare and Medicaid and that at least some of the Bush tax cuts for the wealthiest were not made permanent. It was obvious from the offers he was floating that Obama would have accepted a much worse deal.

It a huge problem that the Democratic President has accepted the Republican terms of the debate over economic policy that were are focusing on deficits and degrees of austerity rather than the critical need for stimulus to create jobs, better financial regulations and solving the problem of too-big-to-fail/too-big-to-jail banks, and reversing the strong trend toward greater inequality which is destabilizing the economy and visibly undermining democracy. Paul Krugman writes in Is Growth Over? New York Times 12/27/2012:

The long-term projections produced by official agencies, like the Congressional Budget Office, generally make two big assumptions. One is that economic growth over the next few decades will resemble growth over the past few decades. In particular, productivity — the key driver of growth — is projected to rise at a rate not too different from its average growth since the 1970s. On the other side, however, these projections generally assume that income inequality, which soared over the past three decades, will increase only modestly looking forward.

It’s not hard to understand why agencies make these assumptions. Given how little we know about long-run growth, simply assuming that the future will resemble the past is a natural guess. On the other hand, if income inequality continues to soar, we’re looking at a dystopian, class-warfare future — not the kind of thing government agencies want to contemplate.

Yet this conventional wisdom is very likely to be wrong on one or both dimensions.
Rising inequality is also a major factor in the actual funding Social Security and Medicare, not just in the form of the desire of Wall Street to get a big cut of those funds. As Krugman writes in Policy Implications of Capital-Biased Technology: Opening Remarks 12/28/25012, "when somebody talks about the need to rein in entitlements [Social Security, Medicare and Medicaid], we should always ask whose interests, exactly, are being served."

And again from Krugman, we have to remember that not only is the deficit debate a bad priority on the basis of substantive economic policy, it also represents what what we might call cognitive capture of the Democratic Party by a Republican scam, one which is good politics for Republicans and bad politics for Democrats. In On the Economics and Politics of Deficits 12/29/2012:

And as Duncan Black [Atrios] points out, the Bush experience tells us something important about fiscal policy: namely, that when Democrats get obsessed with deficit reduction, all they do is provide a pot of money that Republicans will squander on more tax breaks for the wealthy as soon as they get a chance. Suppose Romney had won; do you have even a bit of doubt that all the supposed deficit hawks of the GOP would suddenly have discovered that unfunded tax cuts and military spending are perfectly fine?

The point is that the whole focus of budget discussion is based on a combination of bad economics and bad (and fundamentally dishonest) politics. We’re looking not so much at a Grand Bargain as at a Great Scam.
The grimmest evaluation I've seen of Obama's approach is from Wolfgang Münchau of the Financial Times, who has been very good in his evaluations of the euro crisis (Die europäische Krankheit der USA Spiegel Online 02.01.2013): "US-Präsident Barack Obama hat von Kanzlerin Angela Merkel gelernt, wie man mit Krisen umgeht." ("US President Obama has learned how to deal with crises from Chancellor Angela Merkel.") Since Münchau thinks that Merkel's policies have turned a manageable crisis into a disaster with massive human costs and the possible destruction of the EU, he really, really does not mean that as a compliment. He also thinks Obama's negotiating in the lame-duck is a terrible sign for Debt Ceiling Crisis II.

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