I was watching Obama’s announcement on his latest and greatest cave in to the Republicans: a two year extension of all the Bush tax cuts.  I don’t want to go over the most obvious errors in Obama’s so called political judgment.  However, a more fundamental mistake is his view of current and near term economic conditions in the U.S.  Obama believes that the economy is alive and he is advancing a future growth agendawith this cave in to the Republicans.  Instead, Obama is at best defending policies that will maintain the economic status quo on a moribund economy or worsen it.  Unfortunately for the rest of America, Obama has fallen into a economic trap that will ultimately doom his presidency.

For starters, Obama is touting that the U.S. economy is in recovery. On paper, this appears to be true. The economy is recording economic growth, but sadly, we are in a jobless recovery. Economic growth is so anemic that it is producing little to no jobs to replace jobs that were lost during the recession. And a jobless recovery with unemployment rates hovering around 10% is NOTHING to brag about. In fact, from your average Americans’ point of view, we are still in a recession. As an unemployed person myself, I agree with that assessment.

It seems a no brainer for anyone with half a brain that some type of government stimulation is needed to get the economy producing jobs again. Preferably, a jobs program such as infrastructure development would be stimulative. However, the package of items in the announced compromise is not really stimulatory. In fact, most of the items, at best, will leave the economy treading water.

According to Obama’s comments, Obama got unemployment compensation extensions for another 13 months and a package of tax cuts. While it is true that unemployment compensation has some stimulatory effects during a recession, unemployment benefits are primarily designed as economic stabilizers. Anybody receiving unemployment benefits can tell you that is the case (been on unemployment before, so I know).

Basically, a decent paying job pays a lot more than unemployment compensation any day of the week.

As for the tax cuts item, it has been pointed out time and again that they are not as stimulative as a real jobs program. Yes, there is a 2% payroll tax cut in the compromise, but it is the only new economic stimulative item. The other tax cuts are extensions of the present rates. Translation: the same tax rates that have not produced jobs during the last decade have been saved for another two years. All that occurs is a scheduled tax increase will not happen.

With the exception of the payroll tax cut, Obama got to keep economic policies that either stabilize the economy (unemployment compensation) or have not done jack for producing jobs for the last decade (Bush tax cuts). Given that the economy seems stuck with nearly 10% unemployment, does anybody think that maintaining present economic policies will reduce unemployment over the next two years? Will Americans reward Obama with reelection in 2012 if unemployment is at this same level? No sane person would say “yes” to either question.

So Obama’s compromise, at best, keeps the economic status quo which is a political killer for him in 2012.

Obama’s counter argument to his critics is that tax hikes would kill the economy. Yes, I think that tax hikes would hurt the economy, but the amount of economic pain is debatable. According to Krugman, Obama’s compromise threatens greater economic pain in the future.

I agree with Krugman that Obama has set the stage for further economic hostage taking when it comes to raising the debt ceiling.  When the debt ceiling comes up, Republicans will demand deep budget cuts before raising the debt ceiling.  Once again, we will see a game of chicken.  Republicans will threaten a government shutdown or default on our debt to force severe budget cuts, probably in programs like Medicare or Social Security. 

Obama will fall all over himself to “save” the economy from the Republicans latest burning down the house move, and he will agree to just about any demands the Republicans make with regards to the budget.  As any economist worth his or her salt will tell you, budget cuts during a recession will only deepen the recession.  So now, with Republican help, Obama will create an official double dip recession.

Essentially, this compromise deal is a “win-win” for the Republicans.  Unemployment stays high with the status quo that is enshrined in this deal, and Obama is doomed in 2012.  The deal itself also demonstrates that Obama will cave in to any Republican demand when Republicans engage in economic hostage taking.

What Obama does not realize is that the Republicans have already pulled the trigger and shot the economy in the head.  Obama thinks that he has seen proof of life with the economy, but all he is doing is negotiating for the return of a corpse that will be reeking by 2012.