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Monday, May 16, 2011

Paul Krugman: America Held Hostage

Obama cannot let Republicans hold the economy hostage yet again:

America Held Hostage, by Paul Krugman, Commentary, NY Times: Six months ago President Obama faced a hostage situation. Republicans threatened to block an extension of middle-class tax cuts unless Mr. Obama gave in and extended tax cuts for the rich too. And the president essentially folded...
Now, predictably, the hostage-takers are back: blackmail worked well last December, so why not try it again? This time House Republicans say they will refuse to raise the debt ceiling — a step that could inflict major economic damage — unless Mr. Obama agrees to large spending cuts, even as they rule out any tax increase whatsoever. And the question becomes what, if anything, will get the president to say no. ...
So what will happen if the ceiling isn’t raised? It has become fashionable on the right to assert that it would be no big deal. ... But ... they’re almost surely wrong...
For if we hit the debt ceiling, the government will be forced to stop paying roughly a third of its bills... So will it stop sending out Social Security checks? Will it stop paying doctors and hospitals that treat Medicare patients? Will it stop paying the contractors supplying fuel and munitions to our military? Or will it stop paying interest on the debt? ... At least one, and probably several, of these components will face payment stoppages if federal borrowing is cut off.
And what would such payment stops do to the economy? Nothing good. Consumer spending would probably crash... Businesses that depend on government purchases would slash payrolls and cancel investments.
Furthermore, markets might well panic, especially if interest payments are missed. ... So hitting the debt ceiling would be a very bad thing. Unfortunately, it may be unavoidable. ...
Now, there are good reasons to believe that the G.O.P. isn’t nearly as willing to burn the house down as it claims. Business interests have made it clear that they’re horrified at the prospect of hitting the debt ceiling. ... And a confrontation over spending would only highlight the fact that Republicans won big last year largely by promising to protect Medicare, then promptly voted to dismantle the program.
But the president can’t call the extortionists’ bluff unless he’s willing to confront them, and accept the associated risks.
According to Harry Reid, the Senate majority leader, Mr. Obama has told Democrats not to draw any “line in the sand” in debt negotiations. Well, count me among those who find this strategy completely baffling. At some point — and sooner rather than later — the president has to draw a line. Otherwise, he might as well move out of the White House, and hand the keys over to the Tea Party.

    Posted by on Monday, May 16, 2011 at 12:33 AM in Budget Deficit, Economics, Politics | Permalink  Comments (58)


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