AAA Credit but Junk Bond Politics

August 2nd, 2011



This piece was originally published in Politico.

What if there’s another recession? That’s still a threat, even if the debt deal passes. If the recession starts while Barack Obama is president, it would normally be called “the Obama recession.”

But maybe not this time. Because after the debt deal, The Republicans in Congress own this economy just as much as Obama does. They’re the ones who drove the deal — and if the economy goes into recession, they’ll bear a lot of the responsibility.

The deal initiates a new regime in American politics: The Scarlet A. We’re in for an era of Austerity. The huge spending cuts — half now, half five months from now — threaten to turn a fragile recovery into a double-dip recession.

Then the situation becomes dangerous and unpredictable. Several European countries, faced with debt crises, have initiated austerity regimes. The results aren’t pretty — suffering, protest and instability.

We’ve had 10 recessions in the United States since 1950. All but one started under a Republican president. The exception was the 1980 recession. President Jimmy Carter paid a high price for it. Our last recession started in 2007, under President George W. Bush. Obama was elected to end it.

Obama, however, was faced with an awful choice. If he had not made a deal with Republicans to avert default, it would have been October 2008 all over again — financial panic and a collapse of consumer confidence. His only other option was an austerity deal. That may lead to a similar outcome — only slower.

Democrats clearly lost on policy. The debt deal is all spending cuts and no new revenues. How did that happen? It happened because Republicans had all the leverage. Republicans were willing to accept default. So what if it brought down the nation’s economy? Higher taxes, in their view, would have been worse.

Given a choice between a bad deal (tax hikes) and default, Republicans were willing to allow default. Democrats were not. They took the bad deal (austerity).

Democrats may have lost on policy, but they won on politics. Obama came across as the responsible adult. The polls showed voters favored compromise and a balanced plan — including tax increases on the wealthy. That was Obama’s position, and the voters trusted him more than they did the Republicans.

Republicans came across as extreme and dogmatic. The party of gridlock.

Nonetheless, Obama’s re-election numbers don’t look good. In last week’s Pew Research Center poll, only 41 percent say they want to see Obama re-elected. The reason is not the debt deal. It’s jobs.

Obama’s Democratic base is extremely unhappy with the debt deal. Any Democratic president other than Obama would very likely face a party rebellion — possibly even a primary challenge like the one Carter got from Edward M. Kennedy in 1980.

But that probably won’t happen to Obama. For one thing, Democrats are horrified by the tea party Republicans and do not want to do anything that could give them more power. There’s also the fact that Obama is African-American. Any Democrat who challenges Obama would deeply offend the party’s African-American base. That’s no way to score points with Democrats.

Democrats will have to rely on the fear factor to get out their base next year. Republicans already control the House, and we saw what that led to. Republicans have a good chance of taking control of the Senate as well next year — given the mix of Senate seats that are up.

If Republicans take the White House, too — well, just look at what happened in Wisconsin and Ohio and Florida when Republicans gained total power this year. Pretty scary.

If any party is likely to split next year, it’s the Republicans. The debt debate has opened up a huge divide between establishment and tea party Republicans. If Mitt Romney wins the Republican nomination, there’s a good chance that some of the many tea party factions will rally behind a third party candidate.

Remember, these people were willing to put the nation’s economy at risk. They certainly won’t have any compunctions about bringing the Republican Party down.

Democrats have something else going for them next year: The GOP now has skin in this game.

Republicans insist that debt reduction is the key to jobs. A lot of voters now believe that. In last month’s Washington Post-ABC News poll, 47 percent of Americans said they believe large cuts in federal spending will do more to create jobs, while 44 percent said spending cuts will lose jobs.

That proposition will now be tested. If austerity slows the economy down, it will not only increase job losses. It will also cause tax revenues to decline and make the debt problem worse. In other words, austerity may do the opposite of what Republicans claimed it would.

The debt deal is driven by politics, not economics. It proves to Americans what they already believe: Politics is the enemy of problem-solving.

The United States is now a country with a AAA credit rating and junk bond politics.