Krugman: Obama may be buying off the hostage-takers by giving them more hostages.

[WhaTHellsgoingonhere]

I assume, those like me, who want the fight to continue--firstly, don't believe that we've kissed off UI for good--are more forward looking.

Krugman poses: is it better to be worse off in 2011?

December 9, 2010, 10:21 AM

December 2011
On the straight economics, the tax deal is worth doing. But the history of the past two years drives home, if anyone doubted it, that economic policy must be considered from a political economy point of view; that you have to think ahead to how current policies affect the environment in which future policies will be decided. And the more I work on this, the more concerned I’m becoming.

We already knew that extending the Bush tax cuts makes it more likely that they’ll be made permanent — which increases the costs of doing a deal beyond the direct budget impact. That is, we knew that any deal extending those tax cuts for two years means that we can expect a replay of December 2010 in December 2012, with a high chance of a bad result.

But the new deal creates another hostage situation — this time for December 2011, when the good stuff in the deal is scheduled to run out.

Look at the Zandi estimates: they show a boost to the economy in 2011, which is then given back in 2012. So growth is actually slower in 2012 than it would be without the deal.

Now, what we know from lots of political economy research — Larry Bartels is my guru on this — is that presidential elections depend, not on the state of the economy, but on whether things are getting better or worse in the year or so before the election. The unemployment rate in October 1984 was almost the same as the rate in October 1980 — but Carter was thrown out by voters who saw things getting worse, while for Reagan it was morning in America.

Put these two observations together — and what you get is that the tax-cut deal makes Obama’s reelection less likely. Let me repeat: the tax cut deal makes Obama less likely to win in 2012.

OK, so what? Think about the dynamics that sets up for December 2011. The Democratic parts of the deal will be on the verge of expiring, while the Republican parts will have another year to run. Won’t that put the Dems in a desperate position? Won’t Obama be strongly tempted to make further big concessions to get something to boost the economy for another year?

What could change this outlook? The hostage situation won’t materialize if the new stuff “jump-starts” recovery, so that the economy is on solid footing by a year from now. But as I’ve argued in the past, and continue to believe, this is a bad metaphor.

So there are real reasons to worry here. Obama may be buying off the hostage-takers by … giving them more hostages.

http://krugman.blogs.nytimes.com/2010/12/09/december-2011/

[Poboy]

1. recommend

[Name removed]

2. Deleted message

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[TwilightGardener]

3. But his first sentence is: "On the straight economics, the tax deal is worth doing."

The rest is conjecture about what might happen down the road. It's a gamble, I agree with Krugman, and he's right to be concerned, BUT...what's the risk of doing nothing? Edit to add: or leaving it up to the Republicans?

[WhaTHellsgoingonhere]

4. Technically, his first sentence is conjecture.

Edit to add: Nothing is permanent, yet. We may end up with the same deal.

[TwilightGardener]

5. The whole thing's conjecture, if you want to look at it that way--

but the conjecture I was addressing was the political stuff.

[WhaTHellsgoingonhere]

6. Okay, but the first sentence is trumped by a qualifier...

But the history of the past two years drives home, if anyone doubted it, that economic policy must be considered from a political economy point of view...


More on the economic impact:

Paul Krugman
December 9, 2010, 9:57 AM
Block That Metaphor

Mark Zandi of Moody’s has released his estimate of the effect of the tax-cut deal; it shows a fairly big boost to growth in 2011, with most of that boost given back in 2012. My guess is that the actual numbers will be smaller: I suspect that Zandi’s multipliers assume that more of the payroll tax cut would be spent than is likely to be the case, and I have severe doubts about whether the business tax cut would do anything noticeable. More about the implications of these estimates in my next post (December 2011, the my OP).

First, though, I want to point to something about the way Zandi discusses the outlook. While the numbers say that you get a temporary boost, Zandi says something quite different:

The stimulus was never intended to power economic growth over the long term; rather, it was designed to jump-start the recovery, and did so. The intent of additional stimulus in 2011 would be to ensure the recovery evolves into a self-sustaining expansion, with enough job growth to generate the income and consumer spending gains needed to convince businesses to hire even more. The economy is not there yet, but additional stimulus would get it there.

Uh-oh — it’s the jump-start metaphor (which used to be the pump-priming metaphor, back when Americans still knew what that meant.) It’s a bad metaphor, I’d argue — because it leads people to downplay the problems that arise when temporary stimulus fades away.

More than a year ago, I warned that the spate of relatively good growth news occurring then was only reassuring if you believed that the economic engine had caught, so that we didn’t need to worry about what would happen as stimulus faded away. The problem was that there was no good reason to believe that. As I have since tried to point out more formally in my work with Gauti Eggertsson, the best interpretation of our current difficulties is that we’re suffering from a deleveraging shock, and that the economy will need support until over-leveraged players have had time to work down their debt. That logic implies that you need a tow, not a jump-start; the economy is going to need help for an extended period of time.

This has big, uncomfortable implications for the Obama-McConnell deal. More in another post.

http://krugman.blogs.nytimes.com/2010/12/09/block-that-metaphor/

Edit to add: Again, it comes down to whether you're forward looking or looking for a temporary fix.

[TwilightGardener]

7. Options, at this point, are severely limited. Krugman knows that.

There is no temporary OR permanent fix, because the Republican House can and will change things to their liking after January. Even letting the cuts expire isn't a fix--they will be reinstated in some form, probably in a way that we like even less than this deal.

[Still a Democrat]

8. Krugman's Pulitzer was for Economics

You saw exactly what I did.

[WhaTHellsgoingonhere]

9. I've had that discussion with others...

Politics define economics.

[ThomCat]

10. Actually, it's often the other way around,

economics often defines politics.

[amborin]

11. K&R Obama is viewed as weak, and bullies prey on weaklings