The complete capitulation to Republican extortion by the Obama Administration is likely to have disastrous implications for the economy and for unemployment. The effect of the relentless conservative campaign for austerity is to take ever more income and security from the average working Americans who make up over 95% of the population and concentrate it into the hands of a wealthy elite. In other words, we are continuously taking purchasing power away from those who will immediately spend it and instead giving it to a tiny number of people that will NOT spend it. Rather, they will, at best, save most of it, and at worst, invest it abroad, deploy it in hedge funds that further destabilize the financial system -- or perhaps use it to speculate in oil or food commodities, leaving the rest of us to pay the price.
The result is certain to be weak consumer spending as the vast majority of Americans lack the income and confidence in the future they need to drive the economy. As businesses of all sizes take in less revenue, more jobs will be lost and economic growth will likely stagnate. That, in turn, will depress tax revenues so that the spending cuts may well end up actually worsening the deficit. And we're not just talking about the Federal government: the income taxes, payroll taxes, sales taxes and property taxes that support virtually every level of government will be negatively impacted even as demand for safety net services continues to escalate.
It should have been abundantly obvious to the president and his advisers how this scenario would play out. In fact, the prospect of the Republicans holding the economy hostage was brought up at a White House press conference and responded to by the president back in December 2010, when the administration caved in to Republican demands to extend the Bush tax cut to the top 2%.
What's more important is that we KNOW this will happen again. The Republicans now have more than just a complete victory: they have a winning -- and seemingly flawless -- strategy. And they will have plenty of opportunities to deploy that strategy in the future. The Federal government needs to be funded by Congress, and Republicans will again threaten to shut it down. Unemployment is virtually certain to remain high, and millions are already exhausting even their extended benefits, further depressing the demand for products and services that drives the economy. Unemployment benefits are known to be the most effective form of government spending available in a recession, and yet further extending those benefits would seem to be either impossible -- or it will come at some unimaginable cost.
The truly astonishing thing to me is that the administration had an almost unprecedented opportunity to drive a wedge between Republican politicians and their primary financial backers. The mainstream Republican party is effectively owned by wealthy financial and corporate interests: Wall Street, the U.S. Chamber of Commerce, etc. None of these interests would have tolerated a default. In fact, Tom Donahue head of the U.S. Chamber openly threatened to "get rid of" any Republicans that failed to support an agreement. So why didn't the president use that as a lever to push for a more balanced agreement containing tax increases on the wealthy?
And the administration DID have other options. There is really nothing to justify the level of desperation that led to the agreement on the table. The 14th Amendment to the Constitution offered a credible alternative and was embraced by a number of top legal scholars, as well as by President Clinton. Even the seeming outrageous idea of minting one or more trillion-dollar platinum coins has a strong legal basis, and could have been used on at least a temporary basis -- perhaps an outrageous assault requires an outrageous defense.
If a line is not drawn in the sand now, the future is clear: the extortion will continue unabated, and millions of working Americans will pay the price. The Obama Administration clearly lacks the courage to draw that line. Congressional Democrats should do it for them. Vote down the agreement and force the president to invoke an alternate option to prevent default. The parties could then return to the negotiating table with the implicit understanding that the Republican Party's plutocratic backers will ultimately insure that conservative politicians do what they are told (and paid) to do.
Martin Ford is the author of The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future (available from Amazon or as a PDF download) and has a blog at econfuture.wordpress.com.