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July 10, 2011

As Smaller Debt Limit Deal Eyed, Austerity Already Damaging the Economy

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Just because John Boehner bugged out of the grand bargain, I wouldn’t say that the safety net has yet been saved by Republican militance over tax cuts for the rich. People didn’t pay attention to the fact that chained CPI, for example, which would throw 245,000 older people into poverty by 2050, was already a feature of the debt limit talks before all this talk of a grand bargain started. The Medicaid proposal for a “blended rate” of federal participation, which would shift costs to states and either make the program more costly to beneficiaries or lower reimbursements so much that providers won’t take patients, had the support of the White House when it was included in his April budget package, and the White House continues to defend it even as they acknowledge the importance of Medicaid to the overall health care system. And we know that Medicare cuts were already agreed to in the Biden talks, though all indications are they would be cuts to providers (which I’m actually less concerned about, and who knows, maybe Pharma will take a hit). It’s possible that all three of these features get included in the smaller, $2.4 trillion debt limit deal, although more expanded cuts, like raising the Medicare eligibility age or means testing, are probably off the table now.

With Democrats announcing their opposition on these matters, maybe one or all of them get thrown out too. Maybe defense takes the hit, or Ag subsidies. They’re still working that out.

But it’s important to note that the same problems in the economy from before Boehner dropped out of the talks exist today. The economy isn’t creating any jobs. There may be any number of reasons for that, but I would say one of the biggest is that fiscal policy is contracting. We had a stimulus package, the Recovery Act, which spent most of its money in the last two years. Now, that money has dried up, which means that on net, we are in a period of anti-stimulus. This isn’t just true at the federal level, but in the states, where balanced budget requirements mean spending cuts or tax increases when deficits crop up. To quote Krugman:

So stimulus has been fading out fast; in effect, we’re pursuing a contractionary fiscal policy. Meanwhile, the underlying source of our slump, the high level of consumer debt inherited largely from the housing bubble, has declined only slightly.

And quelle surprise, as Yves Smith would say, the economy is sputtering.

If you do the 1937 thing, you shouldn’t be surprised at getting the 1937 result.

Indeed, fiscal policy has tracked what Republicans claim to want, with less spending and more austerity. And it’s led to a bad economy. The confidence fairy is resting in the clouds.

So though a bullet may have been dodged with the grand bargain talks, what we’re still looking at is either a $2 trillion deficit reduction package or a debt default. And while the latter would be catastrophic, the former would be the opposite of what the economy needs right now. We need immediate action to help the ailing job market. There are legitimate steps to take, just by funding a program of infrastructure maintenance like painting schools or fixing up vacant homes (things that cannot be done by a robot) or providing aid to the states, that would put people back to work right away, giving them money to spend on services, boosting retail sales, and creating a virtuous circle. When the chief executive of PIMCO, basically the bond market, is screaming that a grand bargain must include growth-inducing measures to create jobs, you know this is dictated simply by the facts and not ideology.

The serious people who dismissed Nancy Pelosi’s query of why the debt limit was coupled with deficit reduction are in fact pursuing the out-of-touch strategy by attempting to contract fiscal policy during a jobs crisis.

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