Krugman Tells Obama: DON'T MAKE A DEAL

Paul Krugman

In his brand new op-ed at The NYT, Paul Krugman makes the loudest case yet that Obama shouldn’t rush into any kind of big “deal” with the GOP on averting the fiscal cliff.

Liberals have been going in this direction for a while, arguing two things: Hitting the fiscal cliff would not be a huge catastrophe right away, and the GOP has lost a lot of leverage, so there’s no reason to cave to their insistence on everything.

So Krugman tells Obama not to reach his hand out to far:

In saying this, I don’t mean to minimize the very real economic dangers posed by the so-called fiscal cliff that is looming at the end of this year if the two parties can’t reach a deal. Both the Bush-era tax cuts and the Obama administration’s payroll tax cut are set to expire, even as automatic spending cuts in defence and elsewhere kick in thanks to the deal struck after the 2011 confrontation over the debt ceiling. And the looming combination of tax increases and spending cuts looks easily large enough to push America back into recession.

Nobody wants to see that happen. Yet it may happen all the same, and Mr. Obama has to be willing to let it happen if necessary.

Why? Because Republicans are trying, for the third time since he took office, to use economic blackmail to achieve a goal they lack the votes to achieve through the normal legislative process. In particular, they want to extend the Bush tax cuts for the wealthy, even though the nation can’t afford to make those tax cuts permanent and the public believes that taxes on the rich should go up — and they’re threatening to block any deal on anything else unless they get their way. So they are, in effect, threatening to tank the economy unless their demands are met.

Krugman then goes on to make a very critical point, which is that there’s not really a “cliff.”

Despite graphics on networks like CNBC — which show a car flying off a cliff, ultimately plunging into a fiery death for its driver — there’s no insta-recession on January 1. It will slowly get worse and worse, but it can be reversed at some point early in the year, unlike a debt ceiling default, which would be an instant catastrophe.

Bill McBride at Calculated Risk made this point in his post last night:

My baseline forecast assumes a compromise on the fiscal slope (more of a “slope” than a “cliff”, and January 1st is not a drop dead date). My current guess is an agreement will be reached AFTER January 1st – so that the Bush tax cuts can expire and certain politicians can claim they didn’t vote to raise taxes (silly, but that is politics).

Chad Stone at the centre on Budget and Policy Priorities has made a similar point, pushing back against the madness that a huge deal must be made to avert catastrophe on January 1:

The sooner policymakers enact legislation to put the budget on a sustainable long-term path without threatening the vulnerable economic recovery, the better.  But, as they prepare for an almost certain post-election “lame duck” session of Congress, policymakers should not make budget decisions with long-term consequences based on an erroneous belief:  that the economy will immediately plunge into a recession early next year if the tax and spending changes required under current law actually take effect on January 2 because policymakers haven’t yet worked out a budget agreement.

So this is where non-conservatives are going. Either they take the Krugman “NO DEAL” stance, or they’re going a little less extreme and just pointing out that if there’s no deal by January 1, it won’t be Armageddon.

Read Krugman’s full post here >

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