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Give thanks for the Super Committee fail



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We should all breathe a sigh of relief that the Super Committee seems to have avoided doing further damage to the economy by doing nothing at all.

The economy needs action to stimulate demand and create jobs, but instead we are treated to a spectacle of intransigence on how best to depress the economy even further (the committee's mandate was to cut spending by at least $1.5 trillion over the next ten years). Give thanks that they couldn't agree to how this should be done because they should be doing the opposite, spend more money not less.

The $1.2 trillion in ‘automatic’ cuts to spending that are triggered by the failure of the Super Committee to reach an agreement are less damaging than what was on the table – if the automatic curs are even allowed to take effect at all, which is debatable (a number of GOP Senators and House members are already working to stop the defense side of the automatic cuts). Military spending is among the least stimulative of expenditures, and the social expenditure cuts that are triggered along with it are less than what was likely to come out any agreement from Super Committee.

Nevertheless, there IS a long term deficit problem, but the route to fixing it is economically simple even while politically difficult. The major drivers of the deficit are the Bush tax cuts, the ongoing wars and the recession. The first could be eliminated simply by doing nothing and letting them expire; the second is half done with the departure from Iraq; and the recession could be eliminated any time we choose by passing a second stimulus big enough to do the job.

Here is a quick prescription for what Congress should do, though in an election year it is probably too much to hope that they will do anything worthwhile:

- We have a long term deficit problem. So stop talking about tax cuts, and let the Bush tax cuts expire as scheduled. If taxes MUST be raised, then raise them on millionaires since that will have the smallest negative effect on current spending. Those millionaires are already buying whatever they want, and raising their personal income taxes from 35% to 39.6% won't change their personal spending habits by any measurable amount.

- We are in a recession which is in danger of double dipping.  We need to increase temporary spending on infrastructure projects which need to be done anyway, and which are best done when we need the jobs and can borrow the money at near zero percent (which is now). Add to that some extended unemployment benefits and aid to states to avoid firing cops, teachers and firemen, because we know that all of that money will be pumped directly back into the economy.

- Ignore the fantasies of those who think cutting spending in a recession can boost confidence, or even that it can cut the deficit. Deepening a recession with spending cuts will just reduce tax revenues further and leave us no better off, and possible worse off in terms of both the deficit and growth. It bears repeating that we have a direct measure of investor confidence in the interest rates on government bonds. With those rates below 3% for 30 year bonds, below 2% on 10 year bonds, and below 1% on 5 year it is probable that the real interest rate will turn out to be negative if there is much inflation at all.  There will never be a better time to borrow money to rebuild roads and schools. The banks are literally PAYING us to take the money.

But will Congress and the President do it? I doubt it. Mr. Obama is threating to veto any attempt to reverse the negative stimulus that the automatic cuts will impose. In economic policy terms, the President is acting more like a moderate Republican than a Democrat. And the Republicans' economic ideas are just plain nuts. Split that difference and you don't end up anywhere good.


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