Government officials, especially those at the Fed, have proven too optimistic again and again throughout the crisis. In recent months, they have been saying that they didn’t need to take further action because the economy would soon heal on its own. What do they do now?
Mark Thoma is on the same page:
Why, again, are we spending so much legislative time trying to figure out how to cut the deficit in the short-run -- which will make things even worse -- instead of focusing on job creation? We do need to get the budget under control in the long-run, but deficit reduction can wait until the economy is on better footing. We need more help for job markets right now, not the creation of additional headwinds that work against the recovery.
I know what Republicans think about this. They always believe gov't is bad and can't do anything to help (except sometimes when they control the gov't). That's fine. I get it. Its stupid and flies in the face of facts. But its what they think and they stick to it. So its not surprising they are excited about deficit reduction while the economy continues to drag along.
But what I don't fully understand is why Obama and Democrats are just as willing as Republicans to cut the deficit. I used to think that most of the reason was that Republicans controlled the House and they knew that the only way they could pass a budget and raise the debt ceiling was to offer some of what Republicans want, which is deficit reduction. I still think that is part of the equation. But I've come around to Paul Krugman and Glenn Greenwald's view that this is simply what Obama and other Democrats believe they should be doing. For some reason, they believe the economy is in good enough shape that their priority should be reducing the deficit instead of helping create more jobs.
One thing that Greenwald has talked about, which I think is important to understanding why Obama really believes in this route, is that this is also an electoral strategy designed to keep moderates on board. Obama knows he is going to get Democratic votes no matte what he does. Though he is sure testing us with all of the bullshit he is pulling. So he probably figures that cutting spending will play well with moderates come election time.
Regardless of how close we can get in determining what lawmakers are really thinking right now, its kind of amazing to look at what they are doing and the likely effects of their actions. The Fed is hitting below an already low inflation target while unemployment sits steady at about 9%. They continually refuse to raise inflation in order to get unemployment down. Republicans continue to be Republicans, not giving a shit about anything but tax rates for rich people and big business and gutting entitlements. Obama and Democrats are willingly putting social security and medicare on the table to be cut in order to reduce short term deficits that mean nothing, or at least aren't nearly as important as current unemployment and wage stagnation. Its insane and unemployment will very, very slowly decline and wages will continue to stay the same unless we tell them to change.