Just days after Congress averted a much-discussed debt limit crisis that some feared would produce a market crash and an economic catastrophe, older fears of a “double-dip” recession have quickly reemerged. So what, if anything, can our gridlocked political system, already ensnared in the complex deficit-reduction doomsday machine created by the August 1 deal, do to head off or mitigate another crisis?
Some observers are predicting that an aroused public or chastened politicians will suddenly rediscover the merits of good old-fashioned Keynesian fiscal stimulus measures. Here’s what business writer John Cassidy predicted in Fortune even before the debt limit deal was enacted:
With the economic picture darkening daily, the burden of preventing another slump is falling on the White House and Congress. The Fed, which has just finished its second dose of quantitative easing, seems determined to sit on its hands. Before long, incumbents in both parties will start to panic about next year’s election. Debates about the size of the federal government will take a back seat to getting reelected, and the result will be more tax cuts and spending increases.
But that suggestion seems to assume Republicans have any vested interest in changing their minds on the efficacy of fiscal stimulus and, moreover, can escape the logic of their recent collective decision to simultaneously demand lower taxes and reduced debts and deficits. Meanwhile, with Democrats huddled around their own sacred cow of protecting entitlement programs at all costs, don’t expect them to make an impassioned case for immediate increases in discretionary spending either.
In the short-term, the Obama administration is already dusting off mildly stimulative initiatives that didn’t make the cut in the debt limit negotiations, notably an extension of the payroll tax relief and unemployment insurance extensions enacted as part of the deal to extend the Bush tax cuts last December. The president is also showing signs he will return to the small-bore “winning the future” investment agenda he talked about in his State of the Union Address.
When it comes to gaining Republican support, is the apparent popular rejection of Keynesianism enough to make conspicuous Hooverism acceptable? Don’t even non-Keynesians accept that drastic domestic spending cuts tend to directly boost unemployment, even if you deny claims of its other economic effects? Maybe so, but conservatives are so entrenched in the conviction that public-sector jobs aren’t “real,” and so focused on destroying public-sector unionism as a critical political asset for Democrats, that they’re likely willing to run the risk of boosting short-term unemployment. As recently as Tuesday, the GOP was getting lathered up to go after deeper cuts in FY 2012 domestic appropriations. And while progressive claims that Republicans are deliberately trying to sabotage the economy are perhaps unfair, there’s no question they realize the president and his party will get the bulk of the blame in 2012 for perpetually bad economic conditions.
Indeed, a better bet is that conservatives will double down on their own conviction that the only way to bring back economic growth is through deregulation and tax cuts, accompanied by spending cuts. And Democrats, who for their part still believe in Keynes even though they’ve concluded most of the public doesn’t, will resist new austerity measures, but they will also resist new high-end tax cuts in order to accommodate the remorseless demands of the deficit reduction process. Moreover, as the contents of the debt limit deal illustrated, Democrats have decided to make their chief partisan fiscal stand on the politically strong ground of opposing major long-term changes in Medicare and Social Security, even though entitlement reform is probably the only avenue to big-time deficit reduction measures that do not savage discretionary spending. So instead of coming together to deal with what could quickly become a genuine economic emergency, the two parties may soon be farther apart than ever.
When the “super-committee” convenes to accept or come up with an alternative to automatic spending cuts, mostly of the discretionary variety, an extended economic slump will only further reinforce the fact that there is no obvious “solution” that will be acceptable across party lines. That’s one reason analysts like Cassidy think both parties will figure out a way to junk the entire process. But with the spending-cut-obsessed Tea Party faction howling on the sidelines, it seems inconceivable that Republican congressional leaders will be in a position to suddenly announce that it’s decided Dick Cheney was right back in 2002 when he famously said, “Deficits don’t matter.” Indeed, it would take a truly monumental economic crisis to call off the deficit reduction doomsday machine and bring John Maynard Keynes back from the dead.
Ed Kilgore is a special correspondent for The New Republic.