The impact of the deficit deal on the economy and the pivot to jobs

Originally posted at AMERICAblog

Yesterday I noted that while I strongly support and believe in the need for Democrats, particularly the White House, to shift their focus to job creation, the early signs from the Hill suggested that how Democrats were thinking and talking about this suggested that the pivot was likely to fail. A significant part of my fear stems from the recently completed deficit hysteria, which will make any sort of jobs creation program (either by government spending or tax cuts) a certain target for more deficit hysteria. Atrios captured this perfectly, describing the pivot to jobs as effectively saying, “We solved the deficit problem, now let’s add to the deficit.”

There’s another layer to the challenges created by the deficit deal – namely, prior to any other measures, what impact will it have on the economy and on job creation. As Paul Krugman keeps pointing out, Economics 101 suggests a massive cut in government spending will have an anti-stimulative effect on the economy. But via Digby, we see that Treasury Secretary Tim Geithner is not operating from the same textbook as Krugman and the rest of us:

Well, let’s start with what this deal does. The most important thing is it creates more room for the private sector to grow because although it locks in some very substantial long term savings, the near term cuts are very modest. So that– that was the really critical thing in making sure that this economy continue to grow and recover.

This comes directly in contradiction with JP Morgan’s economic team’s analysis of the economic impact of the deficit deal.

Impending fiscal drag for 2012 remains intact. The deal does nothing to extend the various stimulus measure which will expire next year: we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012. Its possible the fiscal commission could do something to extend some measure such as the one-year 2% payroll tax holiday, though we think unlikely, as it would need to be paid for, which would be tough. If anything, the debt deal may add modestly to the fiscal drag we have penciled in for next year.

While I’m not one to reflexively prioritize the opinions of the titans of Wall Street over government officials, JP Morgan’s analysis is in line with Krugman and other followers of Econ 101 are saying.

Unfortunately Geithner’s spin about the magically positive impact of the deal doesn’t end at growing the economy, but extends to job creation as well.

GEORGE STEPHANOPOULOS: So this won’t cost us jobs?

TIM GEITHNER: No, it will not. Now … if we put this behind us then we can turn back to the important challenge of trying to find ways to make sure that we do everything we can to get more people back to work, strengthen our growth. And we’ll have more ability to do that now with people more confident and we can start to get our arms around the long-term problems.

But this just doesn’t align with what non-partisan experts are saying. The Economic Policy Institute predicts the deficit deal will cost the US 1.8 million jobs in 2012 alone.

Oh and just to be clear that the naive optimism that Republicans will behave like true gentlemen when Democrats pivot to job creation extends beyond anonymous Senate sources, Geithner is on the record making this prediction.

Well, because I think it’s going to be very hard for Republicans to — to prevent that from happening. I think it’s very hard for them to stand up and say that they’re going to try to block the extension of that tax cut that’s worth about $1,000 a year for the average American family. Untenable for them to block that.

As I pointed out yesterday, conservatives don’t care about the deficit, they care about tax cuts for rich people. As such, tax cuts could conceivably be exempted from deficit hysteria and not be offset with comparable cuts elsewhere. But I won’t assume that that is the case until conservatives actually say that they won’t exact their pound of flesh from federal social spending to continue the payroll tax cuts.

And before any Democrats start preaching about the unmitigated blessings of tax cuts as a vehicle for job creation, let’s remember that the Bush tax cuts lead to nothing more than an average of 11,000 jobs per month over the course of Bush’s presidency.

We desperately need to get people back to work in America. But it’s going to be impossible for this to happen when Democrats in the administration and on the Hill are dishonest about where we are and the consequences of their deficit hysteria. Things aren’t getting better on their own and yesterday the President signed a law that will almost certainly be significant drag on the economy. The response to this should be to do a real stimulus that focuses on job creation and infrastructure construction and keeping Americans in their homes, but Democrats now espouse a mindset that says government spending is functionally bad for the economy. The embrace of austerity and the refusal to make job creation a priority earlier mean that working and middle class Americans will continue to suffer, while no price is asked of wealthy elites and with the balance of power as it is, likely never will be asked of them.

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