Shibai Ukie by Masanobu Okumura, depicting the Kanbuki theater Ichimura-za in its early days
To understand just how terrible the fiscal deal is for the Democrats and for the country, you have to start with the realization that we shouldn't even be talking about deficits. We are in a demand crisis, and that means we should be focused on creating jobs and building the economy, taking people from need to opportunity, and from needing government benefits to being taxpayers. Paul Krugman warned about it almost exactly three years ago, before deficit madness had even begun:
The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.

The Obama stimulus had stopped the economic freefall, and likely prevented a deep depression, but it wasn't nearly large enough to spark a real recovery. We needed another stimulus, not cutbacks.
So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.

The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.

And the effect did begin to fade, and the economy started to stumble, and unemployment and home foreclosures remained dangerously high, just in time for the Democrats to get pounded in the 2010 midterm election. Independents favored the Republicans by 15 points, citing the economy as their number one issue. A month after that warning, Krugman was even more worried:
So why the sudden ubiquity of deficit scare stories? It isn’t being driven by any actual news. It has been obvious for at least a year that the U.S. government would face an extended period of large deficits, and projections of those deficits haven’t changed much since last summer. Yet the drumbeat of dire fiscal warnings has grown vastly louder.

To me — and I’m not alone in this — the sudden outbreak of deficit hysteria brings back memories of the groupthink that took hold during the run-up to the Iraq war. Now, as then, dubious allegations, not backed by hard evidence, are being reported as if they have been established beyond a shadow of a doubt. Now, as then, much of the political and media establishments have bought into the notion that we must take drastic action quickly, even though there hasn’t been any new information to justify this sudden urgency. Now, as then, those who challenge the prevailing narrative, no matter how strong their case and no matter how solid their background, are being marginalized.

And fear-mongering on the deficit may end up doing as much harm as the fear-mongering on weapons of mass destruction.

That was where it all began. We should have been focused on a second stimulus and creating more jobs, and even if the Democrats hadn't succeeded in getting anything through Congress they'd at least have been having the right conversation, and they would have had a strong argument heading into the 2010 elections— that they had tried to do more but the Republicans had stopped them. Instead, the Democrats caught deficit fever, and President Obama decided to play the Republicans' game on the Republicans' home field, when instead of pushing for more stimulus he instead decided to appoint a deficit commission, and then appointed the scurrilous deficit hawks Alan Simpson and Erskine Bowles to head it. As if anyone anywhere could possibly have wondered what they would come up with.

The fiscal games of the past couple years have proved the basic dishonesty of our economic political discourse. Let's be clear: No one really cares about the deficit. The Republicans never had any credibility on deficits, and now the Democrats have been playing a similar game. If anyone actually cared about deficits, they'd have let the Bush tax cuts expire, then passed the Obama middle class tax cuts. They wouldn't have wrangled over how wealthy someone has to be to get a tax cut that the wealthy don't need, when there are so many tens of millions of Americans who are in genuine need, they'd have said we need to balance the books, and we won't make any excuses. The middle class would have kept their tax cuts because they need the money and they are more likely to spend it, thus further pumping the economy. And no one would have even raised the issue of Social Security, which has absolutely nothing to do with the deficit. You want to know an easy trick for figuring out if a deficit hawk is flatly dishonest? They will discuss Social Security. It's a game. A ruse. A lie.

(Continue reading below the fold.)

Anyone who genuinely cares about deficits would be focused on growing the economy, creating jobs, reducing government spending not by hurting people but by helping them, turning them into taxpayers, and thus solving the demand crisis by ensuring that more people have more money to spend. It can't be said often enough. And don't let anyone kid you that it's about our bond rating, because when Standard & Poor's lowered it two years ago, they specifically cited the ongoing fiscal brinksmanship as creating risk and uncertainty. And even with that lowered rating, U.S. federal bonds continue to sell. Our national borrowing costs are historically miniscule, which is all the more reason why deficits don't matter now, and in fact should be grown as we borrow at these record minimal costs to further pump the economy with more stimulus. That's how it works. You worry about the deficit after the Keynesian stmulus has produced a genuine and sustainable recovery, which helps reduce the deficit all by itself. In other words, the current state of our politics of economics, with its obsession on deficits and fiscal brinksmanship, is a combination of madness and lies. And with the new fiscal deal fiasco, both the madness and the lies just got a whole lot worse. Mark Thoma quoted Andrew Samwick, who was chief economist for the Council of Economic Advisors in the Lesser Bush administration.

So Who Won the Fiscal Cliff Fight?: Obviously, former President George W. Bush. Despite how much he has been vilified in the years since his departure from office, the Congress and the President yesterday decided to ratify almost all of his tax policy agenda. As Joe Wiesenthal of Business Insider noted, "The difference between the Obama Tax Cuts and the Bush Tax Cuts? Obama's are permanent*." Joe also pointed out, quite astutely, that even if top marginal tax rates are not lower than in the Clinton years, taxpayers with the highest incomes are still paying lower taxes because all the tax rates below the top are lower. Who's laughing now?

As Brad DeLong noted, before the Republicans figured out a way not to save Obama from himself, this time:

But by my back-of-the-envelope count, the deal the Obama administration has agreed to still leaves a net fiscal impetus of -1.75% of GDP to hit the U.S. economy in 2013. That is only 40% of the way back from the "austerity bomb" to where we want to be.

That isn't enough to make it worthwhile to make a deal before the new congress. After Boehner's reelection as Speaker and after the expiration of the Bush tax cuts eliminates the U.S.'s structural deficit, the politics become very different...

But unlike President Clinton, who took the risk of the nation's temporary suffering when he allowed Gingrich to shut down the government, and thus prevented much longer and deeper suffering if he had cut a deal, Obama didn't wait, didn't allow the improved politics to take hold, didn't allow the American people to turn their wrath on an already deeply unpopular Republican Party that already was beginning to tear itself apart as it struggled to figure out how to capitulate, and cut a bad deal that only put off the next round of brinksmanship for a whole 60 days. After winning a mandate election, Obama and the Democrats got a one-year extension on some needed help for people still struggling in this still struggling economy, and the Republicans got most of their beloved tax cuts extended indefinitely. The Republicans also got a free pass to play brinksmanship again in just 60 days, with the Democrats having ceded their best source of leverage. The revenue side of the equation has been eviscerated and the cost cutting now can commence in earnest. And if you want to know how well that will work out, all you have to do is look to Europe, where economic austerity has devastated economies, creating tremendous suffering, social unrest, and a rise in political extremism. That could be our future. And it has been telegraphed, every step of the way.

In 2010, we were told we had to extend the Bush tax cuts, or the big bad Republicans would do mean things. In early 2011, we were told we had to swallow job killing spending cuts, or the big bad Republicans would do mean things. In the summer of 2011, we were told that a Super Congress had to be created, to solve the mess that the regular Congress was being so well paid not to solve, operating under threat of sequestration, because it was the only way to prevent the big bad Republicans from doing mean things. And when the Super Congress failed, and a phony imminence was concocted to force a false sense of urgency over a fiscal curb that was hyped as a cliff to catastrophe, the latest showdown became the latest lousy deal, to prevent the big bad Republicans from doing mean things. And every step of the way it has been the Republican agenda and the Republican narrative that has been winning, even as the Republican Party has been politically losing. Keynes is forgotten. Austerity reigns. The only questions seem to be about its extent. On economic matters, Mitt Romney would have been much worse, but that doesn't mean President Obama has been anything close to good.

Many thought the Republicans would save us from the latest deal, by not voting for higher taxes on the wealthy, but they cleverly waited for the Bush tax cuts to expire, then technically only voted for a new round of tax cuts. The highest income tax rates were allowed to go up all by themselves, as the rest of the high income rates would have, if not for the deal; but the Republicans did allow those highest rates to go up, and that was a clue. Just as it was a clue when the Democrats in 2011 exercised a rare refusal to budge, on the payroll tax, and the Republicans backed down. Every time the Democrats back down, we are told it is because the Republicans are just too mean and too crazy and we can't win, which not only ignores the times the Republicans have capitulated, but also seems to mean that it's best not even to try, and Democrats should just concede defeat by saying they couldn't have won anyway. But there is no reason to believe that.

There is every reason to believe that if the Democrats do refuse to play along when the Republicans force the next debt ceiling/fiscal crisis, enough Republicans will split from the rest of their party, again. Just as they might have, if the Democrats had forced them to choose, last week. The Republicans' fiscal follies already were further alienating a nation that already deeply disliked them, and while President Obama finally seemed to be standing up to them, the Republican leadership clearly was sweating. The evidence indicates that there are actually enough Republicans who either are just rational enough to understand their own political self-interests, or who at least retain a reptilian survival instinct; but rather than test that proposition, the once again increasingly popular president instead made a last minute deal that did not need to be made, and that weakened the Democrats' own negotiating position going forward, and he and the party backed away from the confrontation they already were winning, and instead came to the Republicans' rescue. Yet again.

At some point we have to stop asking ourselves if President Obama and the Democrats are really that clueless or that easily played by a Republican Party that is so buffoonish that only a party as buffoonish as the Democrats could keep it politically alive. President Obama is a seriously intelligent man, and his entire biography is a testament to his strength, perseverence, and courage. He is not a dupe. He is not a fool. So how does he seem continually to get rolled by the Republicans, from tax cuts to budgets to the debt ceiling to the fiscal curb? Maybe he doesn't. Maybe it only seems like he does, because maybe he actually is getting much of what he really wants to get. Maybe he really is more interested in cutting spending than in creating revenue. Not because he is a horrible person, but because he buys into a failed but still somehow predominant economic ideology. Maybe the Republicans are his useful fools, the bad cops to his good, in a careful Kabuki that never was intended to pursue traditional Keynesianism and always has been about imposing austerity. The president's own words underscore the legitimacy of the question:

The truth of the matter is that my policies are so mainstream that if I had set the same policies that I had back in the 1980s, I would be considered a moderate Republican.
He said that in the context of refuting right-wing claims that he is a radical socialist, but his choice of framing was revealing. There were other ways to make the point that anyone who thinks he is a leftist radical is a first rate idiot. But anyone who thinks Obama is more of an old school Republican than an old school Democrat can't just be dismissed as a disgruntled purist. Because the president himself has validated that opinion. Some of us didn't like moderate Republican policy ideas in the 1980s. Some of us don't like them now.

We don't know what will happen over the next 60 days, and maybe the pattern of the last four years finally will be broken. Maybe the president and Congressional Democrats finally will stand up to the Republicans, refuse to play their game, and defend both traditional Democratic Party principles and the common good that those principles did so much to promote. We will see. Even Gingrich himself recognizes the danger for the Republicans. As Democratic Party activists, we must be clear on what is and isn't acceptable, regardless of who is offering what. It's about policy, not personalities. There will be rumors and leaks, and none must be believed, but every lousy trial balloon must be burst on sight. Krugman himself has seen both good and bad in the current deal, but he accurately identifies the danger for the Democrats that lies ahead. And given his consistent accuracy over the past decade, it would be foolish to ignore Krugman's warning:

So why the bad taste in progressives’ mouths? It has less to do with where Obama ended up than with how he got there. He kept drawing lines in the sand, then erasing them and retreating to a new position. And his evident desire to have a deal before hitting the essentially innocuous fiscal cliff bodes very badly for the confrontation looming in a few weeks over the debt ceiling.

If Obama stands his ground in that confrontation, this deal won’t look bad in retrospect. If he doesn’t, yesterday will be seen as the day he began throwing away his presidency and the hopes of everyone who supported him.

If the president finally accepts the confrontation that he has been avoiding for four years, we must have his back. The stakes will be the highest and the pressure immense. But the Republicans must be broken of their will to play economic brinksmanship. It can be done. But if the president doesn't stand up to the Republicans in the coming confrontation, the questions will loom ever larger. For what does this president stand, on economic policy? What does he actually believe? Ultimately, the knowing will be in the doing. Thus far, every confrontation has led to the Democrats ceding ground not only on policy but, even more destructively, on the economic narrative itself. It has to stop.

There can be no more excuses. Either we will grow the economy, expand opportunity, and end the steady expansion of income and wealth inequality that started in the Reagan era, or we will continue down the path of austerity, with the same disastrous results that continue to destroy Europe's economies. And if we do continue down the path of austerity, after all we have been through, after all we have learned— both about the Republicans and about the two starkly different economic paradigms— it will be increasingly difficult to deny the possibility that such was the intention all along. And much more than a presidency and people's hopes will be thrown away. The future of the Democratic Party is at stake, and so is the future of this nation's economy.

Originally posted to Daily Kos on Sun Jan 06, 2013 at 10:00 AM PST.

Also republished by The Democratic Wing of the Democratic Party.

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