Friday, June 01, 2012

Capitulation, revisited

My hope is that today, with its terrible jobs report, is the darkest hour of the Obama reelection campaign.  Or, more realistically, that it's not the start of a lethal slide, for the economy and for the president.  But as Democrats cry sabotage on Twitter, and Michael Cohen, who joins that chorus, then laments that the federal government has done nothing substantial to boost jobs in three years, my mind goes back to the most stinging indictment that Democrats, led by Obama, let that sabotage happen.

That indictment came down on July 31, 2011, as the details of the debt ceiling deal emerged.  The original headline as I recall it, online or in print, was Capitulation.  It lives online now as The President Surrenders:
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.
 A couple of caveats. First, trivially, Adam Serwer beat Krugman to that bleeding metaphor by three days. Second, as Krugman himself has pointed out, the main drag on job growth numbers has been state and local government spending cuts. More federal aid to states would have helped, but that battle was lost before the debt ceiling deal.  Third, the spending cuts agreed upon for 2012 were modest -- the larger cuts were back-loaded.

Fourth, most importantly, while the precedent of government by threatened sabotage still looms, Krugman was wrong about the effect (and predictive power) of this apparent "capitulation" on Obama's subsequent conduct:
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....

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. 
Instead, the President reversed course, challenged the GOP to enact new stimulus and job-creating measures, called them out by name for effectively sabotaging the economy, coolly pulled the trigger on the sequestered, half-military spending cuts resulting from the supercommittee failure, forced a two-step GOP capitulation on the payroll tax cut and extended unemployment benefits, and seems on point to beat them on student loan interest rates too.  Krugman also focuses on Obama's supposed 'capitulation' on the Bush tax cuts in 2010, neglecting to point out that there too (as in the next year's payroll tax cut fight) Obama won substantial stimulus, via the payroll tax cut and unemployment benefit extension. Even the 'inefficient' extended Bush rate cuts for the rich avoided the mild destimulative effect of sunsetting them at that time.

In fact, Krugman may have underestimated the significance of Obama's most significant "get" in the Budget Control Act: freedom from further debt ceiling hijacks until after the election (though the threat of another hostage showdown in the immediate aftermath may be a drag on the economy).  That has enabled him to reverse course and face down the Republicans. Though I still think it was a cardinal error for Obama to accede to debt ceiling-deadlined budget negotiations -- which he embraced as a "unique opportunity to do something big" -- the combination of debt ceiling freedom and spending cuts the GOP doesn't like could yet yield a not-so-bad long-term budget compromise, if Obama can win reelection.  The BCA be cast as a 60-yard punt. 

Hmm, I seem to have talked myself out of my latest Cassandra Krugman tribute -- though he's doubtless right about the long-term effects of the Budget Control Act -- and also about the overall trajectory of Obama's course post-November 2010, which ceded the agenda to Republican budget-cutting frenzy and sold short the possibility of significant further stimulus.

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