Author Topic: The High Cost of Low Politics  (Read 250 times)

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The High Cost of Low Politics
« on: October 19, 2013, 09:06:32 PM »

October 19, 2013
The High Cost of Low Politics

Early this year, it was widely acknowledged that the economy was in for a tough patch. The “fiscal cliff” showdown at the end of 2012 had led to higher payroll taxes and had locked in earlier cuts to jobless benefits, while “the sequester” — deep and arbitrary federal spending cuts enacted to end a previous debt standoff — kicked in on March 1. The only consolation at the time was that several economic forecasters expected conditions to improve later in the year.

That’s not going to happen. By most estimates, the government shutdown and default threat have trimmed about half a percentage point from growth in this year’s fourth quarter. As a result, the year will end much as it began, with growth of around 2 percent at best, which is too sluggish to spur hiring, raise wages, reduce unemployment or boost corporate earnings.

Nor is there any reason to believe that the economic damage will simply reverse itself now that the government has reopened and the debt ceiling has been delayed. That’s because political brinkmanship sows uncertainty — and serial bouts of brinkmanship, which the United States endured at the end of 2010, 2011, 2012, and in the past few weeks, only prolong and intensify that uncertainty.

Consumer confidence dropped during the shutdown. And with the threat of another shutdown and debt ceiling standoff in early 2014, it is unlikely to rebound fully in the months ahead. Ditto for business investment, which has been weakest in precisely those areas that require taking the most risk, including research and development. Bond investors demanded sharply higher interest rates on short-term government debt during the debt ceiling impasse, with some big investors saying they expect a premium in the future to compensate for the risk of new default threats.

President Obama took the right path by refusing to negotiate with Republicans who, yet again, were holding the economy hostage to unacceptable demands. The challenge now is not only to undo the damage, but to put the nation on a path to more jobs, higher incomes and broad prosperity.

From a budget perspective, that means ending and reversing the misguided focus on the deficit. It was never wise or necessary to cut the deficit while the economy remained weak. The political imperative to do so, driven by Republicans and clumsily adopted by Democrats, has had devastating results. Over the past three years, the depth and pace of federal spending cuts have reduced growth by about 0.7 percentage point, equivalent to over $300 billion in lost output and roughly 2 million fewer jobs than would otherwise have been the case. That so-called fiscal drag has been the single biggest weight on economic growth.

To the extent that deficit reduction is politically unavoidable, Mr. Obama and the Democrats should insist that it come mainly from higher taxes rather than spending cuts. Tax increases on high-income individuals and large corporations are less damaging to the economy than deep spending cuts, and income tax increases to date have affected only a fraction of the top 1 percent of filers, leaving room to raise taxes at the top of the income ladder without harming the economy.

Forcing Republicans to relent for now in their extortionate ways is a tactical victory for Mr. Obama and Congressional Democrats in the long budget war. What’s still needed is a budget that taxes and spends with the aim of boosting the economy so that the majority of Americans will, at long last, begin to benefit from the recovery.

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