Sunday, August 07, 2011

Now What?

OK, I'm a bit late to the game, but my basic take on the debt ceiling deal is that for a complete capitulation, it could be worse. The Republicans got the raising the debt ceiling tied to equivalent cuts in spending, no tax inceases, further opportunities to humiliate Obama, and a new hostage to be used routinely in future debt ceiling negotiations. Democrats got spending cuts back loaded, protected programs for the poor from automatic cuts, put defense spending on the table and (possibly) demonstrated that Republicans will step away from the precipice at the last moment. Backloading to avoid immediate economic damage and protecting the poor are important priorities.

So, given that Republican are unwilling to cooperate with Obama in any policies he may believe will benefit the economy, the obvious question is now what. The economy looks just about poised to tank again and Republicans have cut off any action to revive it. Immediate economic recovery may be the only thing to keep the government out of the hands of complete lunatics in 2012. So what can Obama do? I have three suggestions.

(1) Make recess appointments to the Federal Reserve of officials willing to adopt unconventional measures to revive the economy. Right now Republican Senators are apparently ready to filibuster any appointment that would make a difference the House is apparently threatening to hold regular pro forma sessions to block recess appointments. (See here for an excellent discussion of this mess -- and how it is not exclusively the Republicans' fault). Jonathan Bernstein recommends a non-controversial appointment as a warning shot. I say you might as well be hanged for a sheep as a lamb. Republicans will freak out over any recess appointments, you might as well give them something to freak out ove.r Clearly Congress is not going to pass any fiscal stimulus; that leaves the Fed.

(2) Alas, I cannot find the link. It is probably outrageously optimistic, but but I hear rumors that federal and state attorney generals are contemplating a settlement with Bank of America, to serve as a prototype for other banks, that would drop criminal charges in exchange for real relief for underwater homeowners. Since the household debt burden is the primary factor holding back recovery, this would be very important news indeed. Unfortunately, I have heard way too may such false starts to put too much stock in this one.

(3) If you can't get stimulus, you might as well propose it. Yes, granted, political will fo rthe stimulus has passed, and much of it was unpopular to begin with. My response would be this: What is resented is a benefit or a burden is the sense that it is unequally distributed. A bailout of (say) auto companies or a public works project invokes resentment because people see themselves as being taxed for someone else's benefit. By contrast, a universal refund is widely popular because everyone share in it. The bad news, of course, is that a universal refund does nothing for anyone's cash flow and therefore has limited long term effect.

The stimulus most commonly mentioned is some sort of payroll tax holiday -- preferable one longer and deeper than the little one we have now. It will be politically popular because it means a wage increase for everyone, and a tax cut for employers to encourage hiring. Both those things should be well-received. So the Republicans refuse to pass it. So what? Have Senate Democrats introduce it, talk it up, and at least use it to embarrass Republicans. Perhaps you might get a similar opportunity to embarrass with a proposal for aid to the states -- I think by now it is becoming clear that state budget cuts hurt, and that federal assistance to avoid them would probably be popular.

Why do I suspect, though, that Obama's basic response will be to make a few empty speeches and accomplish nothing?

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