Some commentary on today’s economic development —

Ezra writes,

A dramatic gap has opened between the economy as Washington sees it — and wants to intervene in it — and the economy that actually exists. Whatever weak recovery we might have hoped for is being hindered by global commodity prices, consumer deleveraging, fears of flagging demand in emerging markets, earthquakes in Asia, and much more. Globally, it’s been an almost uninterrupted run of crises and bad luck. Meanwhile, Washington just spent two months arguing over whether it would pay its bills or spark an unnecessary financial crisis.

Last week, Congress resolved that question. This week, the markets are tanking. Which suggests that Washington is asking itself the wrong question.

Josh Marshall –

Just remembering back now the international financial institution folks back in 2009/2010 saying it was important to rein in spending since the global economy was already coming back and the risk was inflation and indebtedness. 1937 anyone?

Paul Krugman says, in so many words — toldjah so.

Kevin Drum explains why European banks are in perilous circumstances David Leonhardt says that stock values could go lower still.

The recall elections for six Republican state senators is next Tuesday, and word is the Dem candidates are leading in three of those races and tied in the other three. I get the impression that establishment Democrats in Wisconsin are trying to talk down expectations a bit, and no one is saying it’s going to be a sweep. But by all accounts progressive enthusiasm is running high.

Meanwhile, the opposition is bringing in Sarah Palin, Joe the Plumber, Michele Bachmann and Ann Coulter to help get out the vote on the GOP side.

And Americans For Prosperity got caught being naughty. The wingnut organization sent out fliers to Wisconsin voters with the wrong date for returning absentee ballots.

There are some signs T-Paw is about to end his quixotic quest to be the first POTUS named “Tim.” His campaign has pulled ads in advance of the Ames straw poll — which may just mean he thinks Iowa is a lost cause — and a top adviser has left the campaign. These may be early warming signs rather than signals of an immanent collapse. Still …

Politico reports that the GOP establishment has massive reservations about the general election viability of a Rick Perry candidacy. Ya think?

You may have heard that Newt was accused of buying a Twitter following. Now it turns out that Newt’s Twitter following came about because Twitter put @newtgingrich on its suggested user list. In other words, it was a fluke.

Also this week, Newt called Barack Obama’s administration a “Paul Krugman Presidency.” We wish. Professor Krugman is skeptical.

Word is that debt ceiling hostage taking will now be the new normal. This is according to Sen. Mitch McConnell, who should know. Michael Shear writes,

The very real threat of forcing the nation into a first-ever financial default — along with the potential for economic calamity — will forever be a powerful tool used by lawmakers and presidents alike, the Senate’s top Republican predicted.

“Never again will any president, from either party, be allowed to raise the debt ceiling without being held accountable for it by the American people and without having to engage in the kind of debate we’ve just come through,” Mr. McConnell said moments before the Senate vote on the deal he worked out to raise the debt ceiling by $2.1 trillion.

Ezra Klein adds,

Previously, I’ve compared the debt ceiling to a bomb ticking away at the base of the economy. We don’t much notice it because it’s always been there and, despite a couple of close calls, it’s never gone off. But that doesn’t mean it won’t ever go off. Particularly if these sorts of showdowns become the norm.

And even if it doesn’t go off, Congress’s decision to make the risk of default more visible might well be enough to scare the markets. If you were an investor, would you want to put your money in a country that regularly held bitter partisan brawls over whether you would be paid back? Or would, say, German bonds begin looking like a comparatively better bet?

Just getting close to default caused the world’s economy to stumble, according to Reuters. And Ezra’s right; if the U.S. goes through this same game every few months, investors are going to think twice about investing here.

The debt ceiling is merely a procedural device. It’s a way for Congress to give blanket authorization to the Treasury Department to eliminate having to vote on every separate bond issue. Most nations manage their finances some other way.

However, if we eliminate the debt ceiling, what will take its place that wouldn’t require a constitutional amendment? The Constitution gives responsibility for managing public debt to Congress. I believe we all agree that we don’t want to go back to the practice of requiring a vote on every separate bond issue.

Shearer has what might be a workable idea –

Democratic lawmakers repeatedly argued over the last several weeks that a little-studied section of the 14th Amendment to the Constitution gave Mr. Obama (and future presidents) the authority to simply raise the debt ceiling without waiting for Congress to act.

“The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion shall not be questioned,” the section reads.

An executive order by Mr. Obama could seek to clarify that section, perhaps written to apply only to future presidents to avoid the impression of a power grab. That might lessen the ability of future Congresses to play games of chicken over the debt ceiling.

Or, perhaps he could write the order to go into effect on January 21, 2013, which is the day after the next presidential inauguration. The current debt ceiling deal ought to make it possible for the nation to hold out until then.

We’ve known all along there were two things Republicans dearly wanted. Indeed, these two things were most of the reason the debt ceiling “crisis” was ginned up.

First, they wanted Democrats to vote to cut Medicare. This was to take the sting out of the unpopular Ryan budget vote that promises to hurt Republicans in the 2012 elections. And second, they wanted a deal that guaranteed renewal of the Bush tax cuts.

Republicans failed to achieve either of these objectives. The final deal contained no new revenues, but neither did it promise away future revenues. And Medicaid, Medicare, and Social Security remain untouched.

The question is, will they remain untouched, at least through the end of 2012? As you’ve probably heard, the “deal” includes formation of a special committee that will identify another $1.5 trillion in spending cuts. This committee must issue their findings by November 23, and Congress must give these findings an up-or-down vote, no changes allowed, by December 23.

If Congress fails to pass the recommended cuts, automatic spending cuts go into effect. Half of these cuts will be in the defense budget. The trigger “would exempt Social Security, Medicaid, unemployment insurance, programs for low-income families, and civilian and military retirement. Likewise, any cuts to Medicare would be capped and limited to the provider side.” Matt Yglesias has a chart showing how the non-defense automatic cuts would be distributed.

It’s not clear to me whether there are any restrictions on what the committee might recommend. However, the “trigger” deal is something like a mutually assured destruction pact. Michael Scherer writes,

If Democrats and Republicans do not agree to another $1.5 trillion in cuts later this year, then automatic cuts of about $500 billion in both national security and Medicare provider spending will be triggered, beginning in 2013. Republicans think the threat of cutting Medicare will force Democrats to bargain, and Democrats hope that the threat of defense cuts will force Republicans to bargain.

But what is really happening is something else: Both Democratic and Republican leaders have realized that they don’t have enough political heft on their own to cut a deal. So they are pointing a gun to the knee caps of corporate lobbyists for the defense contracting and medical provider communities and saying, “Help us, or else.”

Be sure to read all of Scherer; it’s fascinating.

Of the initial $1 trillion in cuts that the deal does specify, the “good” news is that only (only?) about $22 billion of those cuts come out of 2012 spending. That might not make the economy noticeably worse before the 2012 elections, although it might not get noticeably better, either. This also leaves open the possibility –well, maybe more of a theory — that the next Congress could repeal this turkey before the bulk of it is in effect (see Nate Silver).

So, if progressive activists manage to not shoot the cause in the foot by spending the next year badmouthing Obama, and instead focus on electing a more progressive Congress, maybe some things can be turned around.

I suspect the political fallout of this mess will do neither party any good. Democrats are disgusted, but so are a lot of Republicans. Both the True Believers of the Tea Party and the hard-core neocons feel sold out today. Jonathan Chait writes,

In other words, the members of the conservative coalition looked around and decided to eat the defense hawks. …

The result, at the risk of spoiling your enjoyment, is that Kristol is not happy. Quite the turn of events. Here was Kristol, loyally serving the party for years on end, including its monomaniacal hatred of taxes, in the belief that this would give him a veto in the one corner of policy he actually cares about, defense and foreign affairs. KristItol was happily chortling along with the party’s plan to hold the entire economy hostage to its demands to slash spending and hold revenue low, confident all along that this couldn’t impact the $700 billion a year we spend on defense. And then, wham, before he knew what was happening, the hostage was out of the closet he was helping guard, and he was standing in his place with duct tape around his wrists. Funny how that works.

This puts Dems in an interesting position. If they make ending the Bush tax cuts for the rich a condition of voting for the committee recommendations, the entire GOP might find itself duct taped –

Then what? Well, then the entire defense lobby plus the entire medical and insurance lobbies turn fiercely against the very people with whom they had marched shoulder-to-shoulder under Bush. If the Democrats hold the line and insist on more revenue, the committee has the potential to split the GOP coalition wide open.

A lot will depend on what the committee recommends, of course. The point is that while the deal stinks, there’s a potential here for Dems to regroup and strike back, if they are willing to do so. My advice to progressives — like they ever take it — is to stop whining about Obama and focus instead on Congress.

Stuff to Read –

Kevin Drum, “It’s Public Opinion, Stupid.” I especially liked this part –

This is why I blame the broad liberal community for our failures, not just President Obama. My biggest beef with Obama is the same one I had three years ago, namely that he’s never really even tried to move public opinion in a specifically progressive direction. But that hardly even matters unless all the rest of us have laid the groundwork. And we haven’t. Wonks, hacks, activists, all of us. We just haven’t persuaded the public to support our vision of government. Until we do, the tea party tendency will always be more powerful than we are.

See also George Monbiot, “A Billionaires’ Coup”

Conventional wisdom being marketed by the media is that the debt ceiling deal is a triumph for Republicans and the Tea Party and a crushing defeat for President Obama. (The Democratic Party itself seems to be sidelined here; it’s just Obama versus the entire Right in this scenario.)

At the high end of the hyperbole scale we find some whackjob at the British Telegraph proclaiming the death of the Socialist Left in America. (We had a Socialist Left? Where has it been all these years?) Another headline says, “Obama forced to swallow Tea Party demands.”

Plenty of bloggers across the political spectrum have bought the CW. Oddly, those claiming to speak for the Tea Party itself are unhappy with the deal. One wrote,

I stand here in abject stupefaction. The so-called “right” or “Tea Party” in this republic is being so thoroughly rolled and defeated that I am struggling to come up with an adequate violent submission metaphor that does not involve prison rape . . . and they honesty think that they’re “winning.” Really? You call this winning?

Silly person. You think the Tea Party belongs to the people who believe in it? Hah. You are just props. The Tea Party is a media fiction that channels the will of its deep-pocket sponsors, and all they care about is defeating President Obama and not paying taxes. So … no new taxes? Obama looks bad? Win/win!

Basically, what we are seeing is the fabricated reaction to the fabricated resolution of a fabricated crisis. It’s all theater.

I’m putting together some analysis that I plan to post later today. The deal itself is neither an unambiguous win for Republicans nor an unambiguous loss for Democrats, unless Democrats allow themselves to be fooled into accepting it as an unambiguous loss. Unfortunately, liberal groupthink requires that we all burn our “Yes we can” buttons and convince ourselves that Mitt Romney wouldn’t be any worse. The rest of August we’ll be seeing the leftie lemmings rush for the cliffs while screaming that whoever is not rushing with them is an Obamabot.

It’s always very possible the “deal” will fail to get the votes. The only thing I will predict is that no one will like it.

Greg Sargent is calling the deal an unprecedented political victory for the GOP. I don’t know about “unprecedented”; I don’t know that it comes up to the level of the Bush tax cuts or the Iraq War resolution of October 2002. And I also suspect the Right will not be happy with it and that most of the Tea Party caucus will refuse to support it. I could be wrong about that, though.

The upside is that the Bush tax cuts are still set to expire and Social Security, Medicare, and Medicaid are untouched. A big downside is that we could still be fighting over cutting this stuff before the current Congress expires. The “deal” creates a bipartisan committee that could do all sorts of mischief. Congress will vote on a balanced budget amendment, which I hope has no chance of passage.

And, of course, the economy will likely be worse off than it is now, although not as bad off as if the nation were to default.

Another downside is that for the rest of the week we’ll be subjected to no end of whining from the Left about how President Obama planned this outcome all along. Because, you know, he is magic and does whatever he wants.

See Ezra Klein, “A Deal That Found the Lowest Common Denominator” and “Democrats Will Lose Now. But They Can Win Later.”