‘Left Hook’ and ‘Right Cross’ to the US Economy”

Why should the Teapublicans agree to Obama and the Democrats’ (aka ‘Timidcrats’) offers to settle the debt ceiling issue? Any seasoned negotiator can see that by refusing to agree to all Democrat proposals since last spring Teapublicans have been able to get Obama and the Democrats to offer even more in spending cuts. They have succeeded as well in getting the Democrats to drop all demands for raising taxes on the rich and corporations. So why should they change that strategy?


Here’s a brief history of the past three months of the deficit reduction charade:


Last spring, Obama and the Democrats caved in on retroactive cuts in the 2011 budget. Boehner wanted $39 billion and he got $38. In June, in back door negotiations with Vice-President Biden, the Republicans demanded no tax increases in any package. Biden agreed to $2 trillion in spending cuts with no tax hikes at that point. After that, you could forget any tax hike idea. Republicans knew it the Democrats would drop it in the end.


Obama then jumped into negotiations in July, trying to resurrect the idea of some tax revenue and trying to extend the time limits past the 2012 election period. He upped the ante, trying to entice the Republicans with massive spending cuts and token tax hikes in exchange for taking the deficit cutting subject off the table until after the election. Obama’s July cuts amounted to 87% in a $4 trillion package with doubtful measures about closing tax loopholes for the remaining 13%.


But Boehner still refused and walked out. After all, the walking out tactic worked the month before with Biden. It would work again.


At this point, just a few weeks ago, the ‘Gang of Six’ jumped in, proposing a package much like Obama’s. The President quickly endorsed it as a way to resurrect his original proposal. The Republicans refused again. Why should they. They already walked out on a similar deal. And Obama offered more.


And so Harry Reid, the lead Democrat in the Senate, has proposed $2.2 trillion in spending cuts—again with no tax hikes, not even loophole closings this time. Of course, the Reid proposal includes $1 trillion in cuts in war spending, which the latest Boehner-Teapublican proposal has adamantly ruled out. In their latest ‘cut, cap and balance’ proposal, Boehner and the Teapublicans specifically exclude any cuts in war or Pentagon spending from their deficit spending cuts.


Boehner’s most recent proposal of Monday, July 26, amounted to only $850 billion in spending cuts, according to the analysis of the Congressional Budget Office, while Reid’s was $2.2 trillion. That provided the opening for Teapublicans to demand Boehner up his proposed cuts. Boehner will now demand even more spending cuts.


The Republicans have won the debate over whether tax hikes will be in any spending package. Obama, Reid, and the Democrats have totally caved in on that issue at this point. The debate is now just over how much spending cuts, whether defense will be included or not, and how much will Social Security, Medicare, and Medicaid be cut.


But what do the Teapublicans and Obama really want? 


The primary objective in these negotiations for Obama is now clearly his demand that these negotiations conclude further deficit cutting until after the 2012 elections. Obama is willing to cut social programs by massive amounts in order to gain what he perceives is a necessary election campaign period advantage of no more debates or cuts until December 2012.


Conversely, what the Teapublicans want is ‘more’. More spending cuts, now that they’ve won the tax hike issue. And no agreement to stop further demands for spending cuts until after the elections. They want to come back to the trough and demand additional spending cuts before the 2012 elections in three more bites: a demand for more cuts as the 2012 budget is concluded October 1; another reopener for cuts in February, and a third go at it in September 2012 as the 2013 budget is being debated by October 1, 2012.


So this is now largely about election year maneuvering. Either way, however, it will mean disastrous consequences for the US economy. The debates on deficit cutting are already producing a serious contraction in consumer and business spending. If business has been hoarding $2 trillion and not spending on investing in the US—which has in fact been the case over the past year—they will now hoard even more. Ditto for banks’ refusing to lend to small business for investing. And that’s just the impact on the real economy from the debates, not the actual cuts in government spending which, when enacted, will result in even deeper impacts on the economy.


These economic effects, moreover, come at a time when the US economy has been heading toward a double dip anyway due to causes independent of the deficit cutting debates. The jobs markets are entering a ‘triple’ dip. Housing is declining again. Manufacturing has leveled off. Foreign demand for US goods is rapidly declining, as China, India, Europe periphery slow or sink into renewed recession. State and local governments accelerate their cuts in spending and raise fees. And the American consumer—70% of the economy—faces declining real income as prices for gasoline, food, healthcare, education all continue to escalate.


And on Friday, July 29, data were released by the US government showing that for the first half of 2011 the US economy has been growing at less than 1.0%! That means the economy is already flat on its back. Adjusting for statistical significance, there is NO GROWTH whatsoever for the past six months. And this BEFORE the impact of the debt debate charade of the past month and the impact of the upcoming jobs numbers on consumers and business spending in the months ahead.


Everyone is focused on the deficit debate issue as the August 2 default deadline approaches. But that is the wrong date. August 2 will not result in a ‘default’, which technically means either the interest or principle on a loan is renegotiated. This writer predicts the US will not technically default. There may be some short delay in payments, but not a true default, which requires a reworking of the terms of prior loans whether principal and/or interest payments.


That does not mean, however, the stock and bond markets will not react negatively. They will and have already begun to do so. We are about to witness a major contraction of the stock markets and similar decline in the value of US bonds. Both will contribute as well to an economic slowdown and toward the emerging double dip.


Readers should watch not only August 2 but what will happen on Friday, August 6, when the jobs numbers for July come out.


The US economy is like a punched-out fighter in the 8th round. He’s been knocked down early in the bout (2008), sent to his knees again (summer 2010), and now the Teapublicans have dealt a left hook to the body (as Obama and Timidcrats dropped their guard) with the debt ceiling debates. But the knockout blow may prove to be the coming right-cross with the August and September jobs reports. The now staggering US economy will drop to its knees yet again, a third time. That’s called a double dip recession.


Jack Rasmus is author of Epic Recession: Prelude to Global Recession, Palgrave-Macmillan and Pluto Press, 2010; and the forthcoming, Obama’s Economy: Recovery for the Few, same publishers, 2011. His blog is jackrasmus.com and website: www.kyklosproductions.com.  

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