Friday, July 1, 2011

Focus on Reducing Deficit Risky, Analysts Say

President Barack Obama made recent comments that have some economists questioning the administration’s plan to maintain fiscal responsibility without endangering an already fragile economy. President Obama reiterated the need for deficit reduction, which could mean an increase in taxes, cuts in federal spending or both, and many believe either of these moves could jeopardize economic growth. Political pundits argue Republicans may support a U.S. default if it means a boost in polls during election time, which is a cause for concern if it increases the chances the administration may be forced into a position that makes avoiding default impossible. For more on this continue reading the following article from Economist’s View.

This is in the mid-range of the Brad DeLong Shrill-O-Meter, but I think it's safe to conclude that he's not happy with the president's remarks in yesterday's press conference:

This Is Very Bad: Barack Obama Fail Department, by Brad DeLong: Can't anybody in the White House play this game?

Barack Obama:

Transcripts: There are a lot of folks out there who are still struggling with the effects of the recession. Many people are still looking for work or looking for a job that pays more. ...

But there are ... steps that we can take right now that would help...

Of course, one of the most important and urgent things we can do for the economy is something that both parties are working on right now, and that's reducing our nation's deficit...

No. No. No. No. No. No. NO. NO!!!!!!!!!

Absolutely the last thing, the last thing, the country needs is to cut federal spending or raise taxes in fiscal 2011, 2012, and it is now looking like fiscal 2013 as well.

Absolutely the last thing the country needs.

It gets worse. Obama:

[B]ecause of the work that's been done, I think we can actually bridge our differences. ... Nobody wants to put the creditworthiness of the United States in jeopardy. Nobody wants to see the United States default. ...

Does Obama read? There are some people who are looking forward to a default. And some of them are in the Republican legislative caucus--or so John Bresnehan and Jake Sherman claim:

"Who has egg on their face if there is a sovereign debt crisis, House Republicans or the president?" said another senior GOP lawmaker.

We have Republicans threatening to default on the debt and blow up the economy if they aren't allowed to put the economy at risk in another way -- through immediate deficit reduction -- and a president selling the demands from the other side as a jobs package. To make it worse, some Republicans seem eager for default to happen based upon the false belief that they'll somehow gain political advantage for wrecking the economy. No wonder the economic outlook is so grim.

With the economy struggling to get back on its feet, "Absolutely the last thing, the last thing" we should be doing right now is making threats or enacting policies that increase the risks of an economic setback. I think it's important to realize that the threat to default on the debt puts the economy at risk even if it is never acted upon, especially as the critical date to lift the debt ceiling draws closer. Republicans aren't just threatening to put the economy at risk in the future if they don't get their way, they are already doing so. If this continues there will likely come a point when markets get the jitters, and if that happens, watch out.

This blog post was republished with permission from The Economist's View.

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