We're in For a Rough Ride

No job creation, rising distrust in government, and a future of political brinkmanship mar the debt-limit "compromise."

Congress’s 11th-hour decision to raise the debt limit after agreeing to a $2.4-trillion deficit-reduction package may have averted economic calamity, but the United States is not out of the woods yet. The long-term effects of the protracted and fractious debt-limit negotiations, coupled with a deficit-reduction package that does nothing to put people back to work, tells me that we’re in for a rough ride.
In particular, there are three things that concern me most going forward:

1. The negative impact of the deficit reduction package on the economy

The American economy is woefully underperforming, and, in such a scenario, cutting spending only exacerbates the problem. The reason for this is that government spending creates demand for goods and services in the economy. Cutting public spending, therefore, will remove much-needed demand from the economy, without which unemployment will likely remain high, as businesses will see no need to bring on new employees.

To be fair, the deficit-reduction package that passed the House and Senate involves no short-term austerity measures. But, at a time when the output gap – the difference between what the economy currently produces and what it is capable of producing – remains large, and the unemployment rate sits above nine per cent, a lack of spending cuts is not a reason to celebrate. The fact is, a long-term deficit-reduction plan should have been coupled with a short-term stimulus plan to create jobs.

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The U.S. debt deal ignores the obvious: a faltering economy. Learn more here.

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In a recent article for The Washington Post, Larry Summers, the former top economic adviser to U.S. President Barack Obama, suggested that, without further economic stimulus to generate demand and job growth, “the economy has at least a one-in-three chance of falling back into recession.” And, if the economy does dip back into a recession, the deficit-reduction package may not make much of a dent on the budget at all. Higher rates of unemployment mean reduced tax revenues, and, thus, larger deficits.

2. The decline in public trust in government

The uncivil negotiations over the debt limit have only increased public skepticism of government. The image of American politicians bringing their own economy to the brink of disaster revealed to the average voter just how dysfunctional Washington has become. According to a New York Times op-ed by Stan Greenberg, a top Democratic pollster, public confidence in the American system of government is at an all-time low since polls began surveying the public’s attitude toward government in 1974.

Public distrust of government hurts Democrats more than it hurts Republicans. “If government is seen as useless, what is the point of electing Democrats who aim to use government to advance some public end?” wrote Greenberg.

Unless Democrats re-establish government as an effective and legitimate institution, they’ll struggle to win back the public trust. New policies to resolve public problems are important, but they will all be for nothing if voters don’t trust the people who carry them out.

3. The likelihood of further political brinkmanship

Perhaps the most alarming outcome of the debt-ceiling debate is that it has set a new precedent whereby the debt ceiling will only be increased if proportionate spending cuts are enacted. A dollar increase in the debt limit will mean a dollar cut from spending.

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Tax increases are still off the table as unemployment and the gap between rich and poor continues to grow in the U.S. Read all about it here.

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On the day the debt limit was increased, Republican Senate Minority Leader, Mitch McConnell, told CNBC that, “In the future, any president, this one or another one, when they request to us to raise the debt ceiling, it will not be clean anymore.”

If McConnell is right, one can expect a repeat of the kind of political brinkmanship we saw over the past month. The danger is that a minority of conservative lawmakers will continue to use the debt limit to extract painful spending cuts. The debt limit may become the vehicle by which the minority attempts to extract concessions from the majority by putting the fate of our economy at stake. Not only would that be bad policy, but it would also weaken our democracy.

Origin
Source: the Mark