In the aftermath of the great 2013 government shutdown/debt ceiling crisis, and the kicking of the can down the road while maintaining austerity once more, the subject on many minds is where do negotiations over fiscal policy go from here? Will the new “budget committee” produce more austerity and do a grand bargain including the “chained CPI”? Will Congress finally turn towards economic growth and job creation, or will we continue to have more shutdowns and debt ceiling crises in 2014?

Chained CPI and the “Grand Bargain”

Let’s begin with “chained CPI” and possible “Grand Bargains.” The President seems to still want one, but the question is, does anyone else? And, if they don’t, can he still get it through?

It’s dangerous for anyone running in 2014 to vote for chained CPI. Surveys show that overwhelming majorities of all Americans want no cuts to Social Security and Medicare, and also that 40% of tea party respondents are 55 or over, and are not likely to support such cuts, either. Nor do they appear to be anti- “their” Medicare. It’s the corporate Republicans who oppose these things. So, I don’t think the corporate Republicans would get much love from the tea baggers for supporting entitlement cuts, apart from Medicaid, which I think the tea party views as welfare. Certainly any credit the Congressional Republicans would get from their tea party base for voting for “chained CPI” would not outweigh their having given in on the CR and the rise in the debt ceiling just passed.

So what can the corporate Republicans in Congress gain from voting for chained CPI? Very little, I think, unless the Democrats get behind it, and then they can run against the Democrats as having sold out Social Security, as long as not many Republicans vote for it. In that case, however, the Democrats won’t have enough cover to vote for it, so they are unlikely to do so.

So, then we have to ask, what can induce the Democrats to vote for entitlement cuts knowing it will hurt them in the elections? Will the President be a big factor in the Congressional elections? He wasn’t in the elections of 2012, and, he was a negative in the 2010 wave election. Can he deliver votes by campaigning for other Democrats? Does he even want to? Does it matter to Congressional Democrats if he gets annoyed at most of them? I doubt all of these things.

Why will Patty Murray and Harry Reid (both of whom may want to run again in 2016) vote for chained CPI? To end the sequester? As Joan McCarter says, the coming second round of the sequester hurts the Republicans more than the Democrats. So, where’s the incentive for Democrats to go along with the President on chained CPI? I don’t think there is any.

If the President wants chained CPI this Spring, then he needs to assemble a corporate, Wall Street-supporting coalition from both parties, and that has to be large enough for a majority in the House. Since many Republicans would see passing the chained CPI as a victory for the President if he continues to support it, and the Democrats in Congress don’t, then we’re talking about a situation where the Tea Partiers and their allies would be called upon to pull the President’s chestnut out of the fire. How many votes do you suppose he’d get from the Tea Partiers and other Republicans for this? Keeping in mind that they just got 144 votes in the House to continue the ruinous shutdown/debt ceiling crisis, maybe 40, or 50? Or even that many, given that they’ll want to run against the Democrats on Social Security in 2014, if possible, and won’t see any political gain in holding hands with him as everyone jumps off the “I voted against SS” cliff?

And how many House Democrats would he get to play along? 150? 100? More? I think if he can’t get 200, an almost impossible outcome with at least 90 “progressives” very uncomfortable with the proposal, then this dog won’t hunt. The more he’s likely to fall short, the more likely it is that Democrats will see themselves as walking the plank for nothing, and will just run away from the proposal, and vote against it if need be.

Now you may see this scenario as far-fetched, because you may be thinking there would be some big omnibus deal with the Republicans that chained CPI would just get tucked into, and that would be irresistible for “progressive” Democrats. But what do the Republicans have to give? They certainly won’t offer any additional taxes on the wealthy. That’s poison to them. And they certainly won’t offer any increased deficit spending, say on infrastructure, because that would weaken the deficit/debt play they plan to run for all they’re worth in the election, and also because they know that infrastructure spending will reduce unemployment, and perhaps improve prospects for Congressional Democrats in the elections.

So what can they offer? Only concessions on the sequester. But here, if Pelosi, Murray and Reid play tough, as they certainly ought to do, then as Joan McCarter explains, the Republicans either have to shoot themselves in the foot again by keeping in place the sequester, or they would have to come to agreement. Then, if the Democrats know what’s good for them in 2014 (not a sure thing by any means, but still likely, in light of how well refusal to budge has served them over the past two weeks), then they won’t accept anything less than full lifting of the sequester. It’s harmed the economy for long enough, we need them to get rid of it, and they need that too.

The Republicans will then play games proposing lifting the parts of the sequester they don’t like, while giving the Dems nothing or only very little. At this point the Democrats need to take an all or nothing position on the sequester, rejecting the Republican’s salami tactics, and calling on the public for an end to the sequester nonsense, which has hurt the economy so grievously already.

The Rs will respond either by agreeing to lift it, or they will refuse. If they refuse, then the Democrats get to blame them for the down economy, we will surely see in the run up to the election, and the Democrats can run against that down economy which they would then claim was caused by the Republican shutdown, multiple debt ceiling crises, sequester, and blocking of any efforts to lower unemployment with jobs programs. (“They promised us “jobs,” “jobs,” “jobs,” and what did we get? Debt ceiling crises, sequesters, a government shutdown, more unemployment, and an economy in the ditch.)

Given that CBO projections will probably show the deficit going down to $400 Billion or less in FY 2014, which is about 2.5% of GDP, the Republican emphasis on “teh debt” and the deficit will not trump a Democratic campaign blaming Republicans for the lack of recovery and calling for jobs programs. Add to the above themes the Republican War on women, and suppression of voting rights of seniors, blacks, hispanics, and urbanites, and we have a Democratic victory in 2014 large enough to get back the House and keep the Senate.

Given all this, I don’t think there will be any Grand Bargain or chained CPI “compromise” in the near future and in the run-up to the election. It just makes no political sense for most Democrats and many Republicans. It may come up again in the lame duck and possibly in the next Congress, Republican or Democrat, if the President continues to push it. But I don’t think we’ll see it again this fiscal year.

Continued Austerity?

What we will see however, is continuing austerity from CRs or budget agreements, whether or not the sequester is lifted. Where a trade deficit exists, Government austerity is either running a surplus, or a deficit so low that it doesn’t make up for the leakage in demand due to the trade deficit. Let’s say one’s trade deficit is 3.5% of GDP, then the Sectoral Financial Balances (SFB) Model (whose terms refer to flows of financial assets among the three sectors of the economy in any defined period of time):

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

tells us that the domestic private sector, taken as a whole, can’t increase its net financial assets, unless the Government has a deficit greater than 3.5%. And, if we wanted to provide for the domestic private sector to save 6% while it was running that 3.5% trade deficit, anything less than a Government deficit of 9.5% of GDP would not meet that objective.

Of course, no budget proposed by anyone in Congress or the White House envisions a deficit this large. Patty Murray’s Senate Budget proposed in the Spring of 2013 envisioned a 4.2% of GDP deficit for FY 2014, just a bit more than the austerity boundary of 3.5%. Paul Ryan’s House Budget proposed a 3.2% deficit, which is an austerity budget, in the precise sense that given a 3.5% trade deficit, it would entail the private sector running a deficit and losing 0.3% in net financial assets.

Will either a compromise bill coming out of the budget committee, or a CR, after a failure to agree on a budget, be closer to Ryan’s or Murray’s deficit figure? I think it will be closer to Ryan’s; partly because the Congress just passed a CR for the first approximately three months of the fiscal year that is closer to Ryan’s view than to Murray’s and which maintains the sequester, and partly because I doubt that the Democrats will even propose a more expansive budget involving a deficit, but will just focus on getting the sequester removed in early 2014, and will then turn to other problems and to positioning themselves for the fall elections.

Growth and Jobs or Shutdowns and Debt Ceiling Crises?

I think the answer is neither. We may have shutdown and debt ceiling threats before the 2014 elections; but we will not have either of these types of crises, because the cost in public opinion, if it keeps trending the way it has been, will be too heavy for many Republican candidates, except for those in the reddest gerrymandered districts, to bear in 2014. I believe they know this, and that many of them are increasingly willing to chance getting primaried by tea party candidates in order to avoid probable defeat from Democrats, if they toe the tea party line and then try to run.

So, I think the shutdowns and debt ceiling scares are over until after the elections. That means there will have to be an agreement on a CR for the first part of FY 2015 by next October 1. That will happen because there’s no way the Republicans will chance another hostage-taking taking a month before the next elections.

That’s the good news. The bad news is that there will be very little growth and very few new jobs. If the sequester remains in place for the rest of FY 2014, unemployment is likely to increase, not decrease, because Government will continue to be a fiscal drag on the economy, and the private sector is likely to avoid expansion without increased demand. That demand could be manufactured by a credit bubble; but it doesn’t look like that is in the offing for 2014. So, the shortfall in demand produced by the Government will not be made up from private sector spending.

On the other hand, if the sequester is lifted, then this will make some difference. We will probably see declining unemployment if that happens, but since the deficit was much too small to sustain a vigorous expansion, even before the sequester, the decline in unemployment, increased job creation, and economic growth, will all happen only slowly, and by election time we will still see an unhappy public, but maybe one that is a little more hopeful about the future than we are now seeing.

I don’t know yet whether the falloff in economic activity due to Government austerity or near austerity, will be enough to produce another recession in the middle of this long stagnation period, Richard Eskow has aptly named “the long depression.” But there is some chance that this will happen before the fall elections. If it does, then we will see a messaging war on who bears the blame for the downturn, and the outcome of the elections will hang on the outcome of that war.

(Cross-posted from New Economic Perspectives.)