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Our Brand Is Crisis: Summers Predicts Double Dip Recession Without Tax Deal

(low res poster via imdb)

Larry Summers just dusted off the bazooka, telling reporters that, if Obama’s tax deal doesn’t pass, the failure will “materially increase the risk” that the economy will stall out and we will experience a double dip recession. Summers added that without a bill, economic analysts will issue downward revisions in growth/employment. The White House combined this with a fact sheet.

We haven’t seen talk of crisis like this since – well, since the bailout vote. My first thought is, doesn’t this secure the absolute failure of Larry Summers to revive the economy? If a 4.6% increase in marginal tax rates can bring the economy to a screeching halt, it means that none of the economic plans of the Administration were in any way sufficient. It’s a total indictment of Obama economic policy. And it makes me take threats from the incompetent claiming a big crisis less seriously – Summers’ credibility is wanting.

Second, I really think it’s time to engage with the economic impact of the deal. Here’s what the White House thinks. They believe that the deal will increase GDP growth in 2011 from 0.5%-1.25%. They cite Mark Zandi claiming that the deal will create 1.5 million jobs, and a CAP analysis claiming 2.2 million. Most economic analysis falls in this range.

None of the economic analysis takes into account the high probability of spending cuts canceling out the stimulative effects. Maybe it shouldn’t – analysts should only look at the deal in front of them. But I don’t think it captures the big picture.

Second, the deal, brokered between Joe Biden and Mitch McConnell (and this is really the problem Congressional Democrats are having – they weren’t consulted), really isn’t a stimulus, it’s essentially an extension of current policy. What’s more, the cost of extending current policy is abandoning new investments in the future. If you thought there wouldn’t be any investment-based stimulus before, there really won’t be now. As Bob Borosage says, “an untold price of the deal is that the White House is bolstering the conservative tax cut mantra in selling it, even as it weakens the president’s own vital case for the need to invest in America.”

So where you put the baseline is important. However, I’ve yet to see any economic analyst parrot what Summers just said – that without extending tax cuts for the rich and getting some additional demand of about $112 billion (that’s the new demand, everything that goes beyond current poliicy, on the Democratic side, from the additional payroll tax cut and unemployment insurance extension), we’ll hit a double dip. I’d like to see that analysis before I believe the guy who failed to fix the economy.

CommunityThe Bullpen

Our Brand Is Crisis – Summers Predicts Double Dip Without Tax Deal

Larry Summers just dusted off the bazooka, telling reporters that, if Obama’s tax deal doesn’t pass, the failure will “materially increase the risk” that the economy will stall out and we will experience a double dip recession. Summers added that without a bill, economic analysts will issue downward revisions in growth/employment. The White House combined this with a fact sheet.

We haven’t seen talk of crisis like this since – well, since the bailout vote. My first thought is, doesn’t this secure the absolute failure of Larry Summers to revive the economy? If a 4.6% increase in marginal tax rates can bring the economy to a screeching halt, it means that none of the economic plans of the Administration were in any way sufficient. It’s a total indictment of Obama economic policy. And it makes me take threats from the incompetent claiming a big crisis less seriously – Summers’ credibility is wanting.

Second, I really think it’s time to engage with the economic impact of the deal. Here’s what the White House thinks. They believe that the deal will increase GDP growth in 2011 from 0.5%-1.25%. They cite Mark Zandi claiming that the deal will create 1.5 million jobs, and a CAP analysis claiming 2.2 million. Most economic analysis falls in this range.

None of the economic analysis takes into account the high probability of spending cuts canceling out the stimulative effects. Maybe it shouldn’t – analysts should only look at the deal in front of them. But I don’t think it captures the big picture.

Second, the deal, brokered between Joe Biden and Mitch McConnell (and this is really the problem Congressional Democrats are having – they weren’t consulted), really isn’t a stimulus, it’s essentially an extension of current policy. What’s more, the cost of extending current policy is abandoning new investments in the future. If you thought there wouldn’t be any investment-based stimulus before, there really won’t be now. As Bob Borosage says, “an untold price of the deal is that the White House is bolstering the conservative tax cut mantra in selling it, even as it weakens the president’s own vital case for the need to invest in America.”

So where you put the baseline is important. However, I’ve yet to see any economic analyst parrot what Summers just said – that without extending tax cuts for the rich and getting some additional demand of about $112 billion (that’s the new demand, everything that goes beyond current poliicy, on the Democratic side, from the additional payroll tax cut and unemployment insurance extension), we’ll hit a double dip. I’d like to see that analysis before I believe the guy who failed to fix the economy.

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David Dayen

David Dayen