In a speech about the economy just now, President Obama spoke at length about income inequality. “The combined trends of income inequality and declining upward mobility pose a fundamental threat to the American dream, our way of life, and what we stand for around the globe,” he said.
It’s good that Obama framed inequality as a long term threat to the economy of the future. But the economy also faces more short-term threats — mainly from Congress.
On Friday, November’s jobs report comes out, and as Danny Vinik points out, this could be a potentially serious one. The economy might be strong to survive without unconventional support from the Federal Reserve. But if Congress blunders into another shutdown, or passes another great dose of austerity, it would be yet another body blow to the recovery.
Here’s what’s happening: if November’s jobs numbers strong beat expectations, then the Federal Reserve may feel it has the room to start tapering its unconventional stimulus programs. Normally, such action would slow the economy as people begin to fear that the Fed is going to strangle the recovery in the crib, but Ben Bernanke has been doing his level best to convince people that tapering doesn’t mean a tightening of monetary policy. This would work a lot better if he had some policy to replace quantitative easing with, but it might still work.
The wild card in all this, though, is Congress. Like a herd of silage-drunk cattle, the House-Senate budget conference just blundered through their first deadline in the budget talks to replace the sequester. They were supposed to have a top-line budget number by Monday, but to everyone’s complete and utter lack of surprise, they didn’t make it.
The sticking point of negotiations continues to be the same pointless austerity nickel-and-diming on which every previous negotiation has failed. Here’s CNN detailing the problem:
Talks have gotten far enough to confront a political reality: any deal to roll back spending cuts must include an equal amount of new fees or revenues to make sure the deficit is unaffected. Otherwise, Republicans will not sign on. And any new fees or revenues require legislation. A non-binding budget report wouldn’t cut it.
That basically means that Republicans have pocketed the sequester cuts, and the negotiations are now taking for granted the idea that some combination of different spending cuts and tax increases are the only thing permissible to negotiate over. The range of acceptable discussion runs the gamut from tax-side austerity to spending-side austerity. (Which flavor would you prefer to continue to hold back economic recovery?)
Even if some agreement is reached, it’s easy to imagine Heritage Action coming out against any new proposal, meaning it must be passed through the House with Democratic votes, and John Boehner is notably shy about doing that without being forced by desperation. Another government shutdown, while unlikely, could easily happen if only by accident.
Meanwhile, there may be no way to prevent Congress from allowing 1.3 million people to lose their unemployment benefits, or reversing the sharp cuts to food stamps, which are one of the most destructive forms of austerity. (In fact, Republicans demand much, much greater cuts to food stamps.)
As the CNN report says, the ostensible reason to cut spending and/or raise taxes is to keep the budget deficit low. But government borrowing costs are still near historic lows, and the budget deficit is plummeting like a stone. Meanwhile, unemployment is still high, inflation is still low, and hysteresis is turning unemployment into long-run structural damage.
Overall, the austerity binge has cost the economy about 3 million jobs at this point. Put simply, this is insane, and there is no sign Congress will stop it anytime soon.