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Home Publications Blogs Beat the Press Wall Street Journal Claims President Obama is Delusional About Economy

Wall Street Journal Claims President Obama is Delusional About Economy

Saturday, 22 December 2012 17:35

One should always take second hand accounts from secret meetings with more than a grain of salt, but the Wall Street Journal's account of President Obama's position in his negotiations with Speaker Boehner should raise some concern. The WSJ told readers:

"The president told him [Boehner] he could choose one of two doors. The first represented a big deal. If Mr. Boehner chose it, the president said, the country and financial markets would cheer. Door No. 2 represented a spike in interest rates and a global recession."

Huh, a spike in interest rates and a global recession? What exactly could President Obama mean if he really said this? If there is no deal over the course of 2013 [not by January 1, that is a fairy tale told for children and Washington pundits] then it is likely that we will see a recession, as the Congressional Budget Office and others have projected. But a recession is associated with lower interest rates, not higher interest rates.

If President Obama really thinks interest rates will spike because of a big tax increase coupled with the cuts in the sequester then he badly needs some new economic advisers. I'm always open to new economic theories, but it's hard to see how you can get from standard economics to this sort of story. 

If the WSJ is confident in the reliability of its sources it should be running a news piece on President Obama's loony economics.

Comments (7)Add Comment
Standard tactic for hostage negotiation
written by Matt, December 22, 2012 5:33
Look, when you're conducting a hostage negotiation it sometimes helps to use the hostage taker's own mythology - and right now, Boehner and the rest of the GOP are looking awfully twitchy with that gun held to their own forehead.

The other possibility, of course, is that the WSJ's source didn't have much detail, leading them to fill in the gaps with their own economically-impossible results.
It's not a hostage negoiation
written by JDM, December 22, 2012 7:57
Well, it's not a hostage negoiation; it's budget talks over a made-up dealine that isn't very scarey. What you do in that case -- if you want a stronger economy and no Social Security and Medicare cuts -- is to go on TV, as any president can, preempt as many channels as you can get on -- lots -- and tell everyone it's a made-up dealine and not scarey, that nothing much happens for weeks at least after the deadline, and that the bargaining position for the vast majority of the American people -- excluding those who blew up the economy -- will be vastly stronger after Janurary 1, 2013.

Then you describe to them how Republicans have destroyed the economy and tried to take money out of the hands of the vast majority of the American people to give to a few rich people.

Repeat every week if needed.
written by Leonard C Tekaat, December 22, 2012 8:06
If you are interested in new economic policy you should be interested in the Zero Inflation Taxation Policy. We have a flaw in our economic policies. Currently we rely on the Federal Reserve to manage the economic cycles of boom and bust. They cannot do it efficiently with monetary policies. It would be more efficient to use the tax code automatically before the Fed gets involved, to manage economic cycles. For more information on how to correctly use the tax code to help make our economy to be more productive and less speculative go to wp.me/p1gMnS-8i or www.foreclosurecrisissolved.wordpress.com
Cliff Diving Looking Good
written by Robert Salzberg, December 23, 2012 7:35
Here's what I think is the most important exchange between the Speaker and the President:

" in reference to Boehner's offer to secure $800 billion in revenue by limiting deductions, the speaker reportedly implored the president, "What do I get?"

The president's alleged response: "You get nothing. I get that for free.""

With 9 days to go, the President will get tons of tax hikes if the House does nothing...Then the game switches to what the House will concede in exchange for things like lowering taxes on those making between $250,000 and $400,000 or lowering taxes on dividends etc..
written by skeptonomist, December 23, 2012 8:31
When Krugman and Baker say that a recession would cause lower interest rates, they apparently are referring to the rates on Treasuries. But in the past, recessions have invariably caused *increases* in the rates for corporate bonds. This happened in the Depression and it happened in the recession of 2009 (see for example the rates on Baa-rated bonds at FRED). As Krugman explained in 2009, when the economic outlook is uncertain, investors flee bonds which are viewed as more likely to default and buy Treasuries instead. What influences private investment is of course the private rates, not Treasury rates. But while the increasing spread between corporates and Treasuries is generally a bad thing for the economy, it is a result and not a cause of recessionary conditions.

If it really comes to the point that the bond market considers there to be a significant risk of default of Treasury bonds this historical pattern could change. This is apparently what the "bond vigilante" alarmists are claiming will happen. Nothing of the sort has ever happened in the US, and it certainly did not happen in 2011 when S&P downrated Treasuries. Greece and other shaky European countries are a different matter - someone who really wants to approach this subject rationally could look at what corporate bond rates have done in Europe through the recession.
Hostage Taking and Poker
written by Stuart Levine, December 23, 2012 10:55
I tend to agree with Matt's comments, above. The President is simply playing poker with Boehner. He understands that he has the better hand and merely has to convince Boehner to fold.
Perhaps referring to downgrade?
written by Jon Hendry, December 24, 2012 11:15
Perhaps Obama was including the debt limit in the 'Big Deal', and the interest rate spike would be a result of downgrades due to not raising the debt limit, or rating agencies otherwise being spooked by the GOP.

(Ignoring whether downgrades actually would have any such effect.)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.