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Krugman: The Debt Deal Will be Catastrophic

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Paul Krugman, Laureate of the Sveriges Riksban...

Paul Krugman outlines why the debt ceiling deal being proposed in Washington may temporarily save the economy from the abyss, but won't do anything to address the deep structural problems that have seen years of economic stagnation:

We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Indeed, slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse.

Although the details of the deal have yet to be released, it is widely understood that the Republicans have essentially gotten exactly what they wanted while Obama has managed to retain nothing from his original position. Unfortunately, it's a classic Obama negotiation - start from the center, expect the Republicans to be reasonable, lose everything you initially wanted, then pass Right Wing legislation that you now own and won't work.

The fact is that the debt ceiling debate should never have happened - Obama should have made it a 'hands off' topic from the get go rather than engage with the Republicans who have held the country hostage to its ridiculous demands. As a consequence, the Republicans have now learnt to use massive threats to get what they want - and it has worked.

It is hard to pin too much of the blame on Obama. He has an enormously difficult job and must deal with an opposition party so completely insane that he cannot have rational conversation. But he does keep making the same mistake of allowing them to frame the debate on their terms - a strategic flaw that is allowing them to control legislation without actually governing.

The debt deal further ties Obama's political fate to the economy.

If it fails, so does his Presidency.

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