Debt ceiling/deficit reduction deal sends stock market into a tail spin

Dow Jones hits lowest point of the year

The President originally asked simply that the debt ceiling be lifted so that the U.S. would not default on paying its bills.  He thought the deficit reduction should be taken up as a separate action.  The Republicans, driven largely by the tea party faction, insisted that any permission to raise the debt be done on the condition that spending be cut in an amount at least equal to what the debt ceiling is raised.  With the threat of total financial disaster looming as a certainty if the U.S. defaulted, President Obama gave in to Republican demands on deficit reduction.  As the news of what he agreed to became known last week as the agreement took shape,  the stock markets began an 8-day plunge in which they declined to their lowest point of the year.


The last minute deal was widely touted on the news as a demonstration of how our Republic works through finding compromise.  In fact, the whole debt crisis debacle was a demonstration of how it does not work.  First of all, the crisis was a self-inflicted one.  When the deficit hawks decided to use the threat of default to get their way, they held the nation hostage and Obama and the nation ended up paying the ransom.  


The terms of the agreement threaten to renew the recession by resulting in more job cuts, more financial uncertainty over which business is sitting on cash it has earned during a period of high profits, and eliminating much-needed improvements to the infrastructure.


Part of the market plunge is in response to more instability in Europe, as Italy, Spain, and Portugal add to the financial problems typified by Greece.  But in the U.S., the problem is that promised spending cuts threaten to reverse the slight economic gains made since 2008.


No one argues that the deficit does not need to be vigorously addressed.  But the solution agreed totally ignores the effect it will have on the economic recovery.  Nobel Prize economist Paul Krugman says:

it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.


The claim by the Republicans is that the stimulus money and bail-outs which contributed to the deficit have been ineffective and merely aggravated the recession.  Wall Street and much of corporate America, such as the auto-makers, are so opposed to any government intervention that they are loathe to admit that government action saved them and save entire industries, particularly the financial industry which has enjoyed record profits since its rescue.  

Another example of the total dysfunction of government is in the failure to authorize the FAA.  Four thousand employees are laid off and a billion dollars a month in lost revenue from airline ticket taxes is lost.  The major sticking point is that the Republicans are insisting, modeling after Wisconsin's anti-labor pogrom, that the labor unions be further restricted and made ineffective in representing the workers.

It is very easy to see that the democracy has reach its failure point.  And it is easy to see why.  In his zeal to accommodate his opposition, Obama is allowing a new class of oppressors to end democracy as we have known it. 

I add this statement from Robert Reich:

Anyone who characterizes the deal between the President, Democratic, and Republican leaders as a victory for the American people over partisanship understands neither economics nor politics.

The deal does not raise taxes on America’s wealthy and most fortunate — who are now taking home a larger share of total income and wealth, and whose tax rates are already lower than they have been, in eighty years. Yet it puts the nation’s most important safety nets and public investments on the chopping block.

It also hobbles the capacity of the government to respond to the jobs and growth crisis. Added to the cuts already underway by state and local governments, the deal’s spending cuts increase the odds of a double-dip recession. And the deal strengthens the political hand of the radical right.

Yes, the deal is preferable to the unfolding economic catastrophe of a default on the debt of the U.S. government. The outrage and the shame is it has come to this choice.