Man, does Tom Tomorrow nail "Debtpocalypse"! And James Surowiecki adds useful notes in "The New Yorker"

Debtpocalypse deferred!
by Tom Tomorrow

[Don't forget to click to enlarge.]

" Austerity during an economic slowdown isn't just bad for the unemployed. It's also bad for business."

-- The New Yorker's James Surowiecki, on his "Financial
Page" this week (Aug. 15 & 22), "The Business of Austerity"

by Ken

And the few loose ends Tom leaves are nailed down by James Surowiecki on his "Financial Page" in this week's New Yorker, "The Business of Austerity."

When Congress finally reached an agreement to lift the debt ceiling, a week ago, many predicted that investors would react with a sigh of relief. After all, on the surface the deal looked good for business, allowing the U.S. to avoid defaulting on its debt while preserving corporate tax loopholes and avoiding a tax hike for the wealthy. And it was a clear victory for congressional Republicans, traditionally corporate America's best friends in Washington. (The Chamber of Commerce spent more than thirty-four million dollars in the 2010 election, almost entirely on Republican candidates.) Yet the prophesied relief rally never materialized. Instead, investors spent the week dumping stocks as fast as they could.

The debt deal alone didn't send stocks spiralling downward, obviously. But the market's plunge was largely the product of fears about the prospects for corporate profit in an increasingly weak economy, and the debt agreement amplified those fears. . . .

Pointing out that markets "tend to be spooked by uncertainty," Surowiecki makes a chilling point:

[T]he debt-ceiling agreement has increased uncertainty by making it more likely that we'll see down-to-the-wire, default-risking negotiations in the future. Senate Minority Leader Mitch McConnell was explicit about this last week, saying that there would be no more "clean" debt-ceiling increases in the future -- in other words, Republicans will keep using the threat of default as a political weapon. This approach may well be extended to bargaining over budget resolutions as well, with Republicans threatening a government shutdown unless they get what they want. If that sounds improbably reckless, consider that every Republican Presidential candidate except Jon Huntsman came out against the final debt-ceiling deal. Even if you explain this as pandering to Tea Party voters, there's no ignoring the fact that these candidates were advising congressional Republicans to let the United States default. Once games of chicken become the accepted way to resolve budget issues, the U.S. economy will become a much riskier place.

"The deal also hurts business in more concrete ways," Surowiecki writes. The spending cuts, he says,

will likely hit precisely the kind of public spending -- on infrastructure, basic research, and defense -- from which corporate America reaps great, if often unacknowledged, benefits. More important, the debt-ceiling fight made clear that, even as the economy struggles to avoid recession, no help can be expected from Washington. President Obama may be talking about the need to create jobs, but, with the advocates of austerity in charge, it's hard to see where support for any new government initiatives is going to come from. Indeed, it's possible that Republicans will block the extension of unemployment-insurance benefits and of the current payroll-tax cut. That would deliver a significant hit to the economy next year.

And Surowiecki argues provocatively that the rich aren't even being served by the imposition of austerity.

Decades ago, America's rich were a true rentier class. They got most of their income from bonds and lived off their investments, and their main priority was keeping inflation low, regardless of anything else that happened. So austerity suited them nicely. The rich of today, by contrast, get much more of their income from their jobs and from the stock market, which means that they do better when growth is strong. And, while companies have figured out how to make money even during steep downturns -- during this very weak recovery, corporate profits have rebounded strongly -- over-all corporate profits are below where they were in 2006. . . . So, while corporate America has been doing well relative to everyone else, it would be doing much better, and investors would be much happier, if growth were stronger and unemployment were lower, even if inflation and government spending were higher. Austerity during an economic slowdown isn't just bad for the unemployed. It's also bad for business.

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