Skip to main content

Economy will limp along in 2013

By James K. Galbraith, Special to CNN
updated 5:24 PM EST, Tue January 1, 2013
A job fair in December in New York City.
A job fair in December in New York City.
STORY HIGHLIGHTS
  • James Galbraith: I do not foresee economic disaster in 2013
  • Galbraith: The economy will limp along at best, despite raising taxes on the rich
  • He says the job market will continue to be lousy for young and old alike
  • Galbraith: If social insurance programs are cut, the middle class will suffer

Editor's note: James K. Galbraith is the author of "Inequality and Instability: A Study of the World Economy Just Before the Great Crisis" (Oxford University Press). He teaches at the University of Texas at Austin.

(CNN) -- Let's start with the good news. If the House passes the deal, the fiscal cliff melodrama will be over. Under the spur of this contrived crisis, Congress will let tax rates rise (just a bit) on the very wealthy, extend unemployment insurance, and defer the sequesters for a couple of months. Good.

Even better, there have been no new cuts (yet) to Social Security, Medicare or Medicaid. Would those who wasted December predicting disaster if these programs were not gutted by Christmas now in penance please be quiet for at least six months? Could we instead spend those months doing something useful, like raising the minimum wage?

Drumbeat against social insurance

James K. Galbraith
James K. Galbraith

Sadly, no. The first thing we can be sure of is that the Beltway drumbeat against social insurance will start again. The next pretext will be the debt ceiling, which will now occur alongside the new sequester deadline in late February, shifting leverage to the right. It seems the president has decided that the Constitution, which orders that all public debts shall be paid, is optional on this point. So it will be up to Sen. Harry Reid and his majority to battle on in defense of our most vital programs, so deeply hated by the eternal enemies of the New Deal.

Become a fan of CNNOpinion
Stay up to date on the latest opinion, analysis and conversations through social media. Join us at Facebook/CNNOpinion and follow us @CNNOpinion on Twitter. We welcome your ideas and comments.



It's up to the House: fiscal cliff faces Republican-controlled territory

Economy will limp along

Meanwhile, we will discover that raising taxes on the rich makes no difference. Interest rates, already near zero, will not go down. Consumer spending and business investment will not be changed. Keeping middle class income taxes and the alternative minimum tax from rising is also a no-change step; same goes for the one-year reprieve for unemployment insurance.

None of these measures will increase total private spending, which would have been useful right now. And the one tax break that no one tried hard to save -- namely, the expiring payroll tax holiday -- will cut into spending power where it hurts. Given that drag, the economy will limp along at best.

Where are the jobs?

Barring a new recession -- now unlikely -- the Fed's new 6.5% unemployment rate target will be approached the hard way: Not with new jobs, but mainly because workers desert the labor force, take retirement, or just drop out. This will be lousy for young and old alike.

Household finances could improve

Most Americans will continue to pay down mortgages, even where they remain larger than the value of their homes. They will do it because they consider it right and honest to do so. Some, unable to hang on, will default and be foreclosed. The bankers whose frauds ruined the middle class will go mostly unpunished, except perhaps by civil plaintiffs.

Still, whatever happens, household finances will improve slowly so long as the safety net (which is the federal budget deficit) continues to support total incomes. Yes, you read that correctly about the deficit. We would be much worse off without it. As of today, the big risk to the economy is that austerity measures so far avoided, including cuts in Social Security, Medicare and Medicaid, will be imposed to get past the debt ceiling and to again defer the sequesters. If that happens, it would slow the economy and squeeze the middle class even more.

5 things to know about the fiscal cliff

Europe's crisis will worsen

In Europe, where the fiscal fools are in complete control, things will get worse. Europe does not have a government that can run a deficit covering the entire union. So the pain falls on Greece, Spain, Portugal, Ireland and Italy. These countries are being forced to damage and even destroy themselves with spending cuts and tax increases, mainly to satisfy the Germans. And the German powers-that-be will argue that Germany too must now face "iron austerity" even though it has no financing or competitiveness problem. If that argument prevails, the European Union will take another step toward ruin. The model of Yugoslavia comes to mind.

China may be OK

China remains the exception, since it is governed by pragmatists who are not afraid to run budget deficits when needed. But Chinese people are impatient with the collateral damage from growth: Inequality, environmental stress, and especially corruptions. Chinese growth is vulnerable to rising energy prices, as is Japan.

I do not foresee economic disaster in 2013. But forces that could produce disaster -- mainly attacks on our most vital and successful social programs in the name of deficit reduction -- are at work almost everywhere. So it's a good year to reflect on what has already gone wrong by looking first at what is wrong and changing our thinking.

Follow us on Twitter @CNNOpinion

Join us on Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of James K. Galbraith.

ADVERTISEMENT
Part of complete coverage on
updated 7:22 PM EDT, Fri September 19, 2014
Is ballet dying? CNN spoke with Isabella Boylston, a principal dancer at the American Ballet Theatre, about the future of the art form.
updated 5:47 PM EDT, Fri September 19, 2014
Sally Kohn says it's time we take climate change as seriously as we do warfare in the Middle East
updated 9:02 AM EDT, Fri September 19, 2014
Dean Obeidallah says an Oklahoma state representative's hateful remarks were rightfully condemned by religious leaders..
updated 3:22 PM EDT, Fri September 19, 2014
No matter how much planning has gone into U.S. military plans to counter the Islamic State in Iraq and Syria, the Arab public isn't convinced that anything will change, says Geneive Abdo
updated 11:44 AM EDT, Fri September 19, 2014
President Obama's strategy for destroying ISIS seems to depend on a volley of air strikes. That won't be enough, says Haider Mullick.
updated 9:03 AM EDT, Fri September 19, 2014
Paul Begala says Hillary Clinton has plenty of good reasons not to jump into the 2016 race now
updated 11:01 AM EDT, Fri September 19, 2014
Scotland decided to trust its 16-year-olds to vote in the biggest question in its history. Americans, in contrast, don't even trust theirs to help pick the county sheriff. Who's right?
updated 9:57 PM EDT, Thu September 18, 2014
Ruben Navarrette says spanking is an acceptable form of disciplining a child, as long as you follow the rules.
updated 11:47 AM EDT, Fri September 19, 2014
Frida Ghitis says the foiled Australian plot shows ISIS is working diligently to taunt the U.S. and its allies.
updated 3:58 PM EDT, Fri September 19, 2014
Young U.S. voters by and large just do not see the midterm elections offering legitimate choices because, in their eyes, Congress has proven to be largely ineffectual, and worse uncaring, argues John Della Volpe
updated 9:58 PM EDT, Thu September 18, 2014
Steven Holmes says spanking, a practice that is ingrained in our culture, accomplishes nothing positive and causes harm.
updated 2:31 PM EDT, Thu September 18, 2014
Sally Kohn says America tried "Cowboy Adventurism" as a foreign policy strategy; it failed. So why try it again?
updated 10:27 AM EDT, Thu September 18, 2014
Van Jones says the video of John Crawford III, who was shot by a police officer in Walmart, should be released.
updated 10:48 AM EDT, Thu September 18, 2014
NASA will need to embrace new entrants and promote a lot more competition in future, argues Newt Gingrich.
updated 7:15 PM EDT, Tue September 16, 2014
If U.S. wants to see real change in Iraq and Syria, it will have to empower moderate forces, says Fouad Siniora.
updated 8:34 PM EDT, Wed September 17, 2014
Mark O'Mara says there are basic rules to follow when interacting with law enforcement: respect their authority.
updated 9:05 AM EDT, Tue September 16, 2014
LZ Granderson says Congress has rebuked the NFL on domestic violence issue, but why not a federal judge?
updated 7:49 AM EDT, Tue September 16, 2014
Mel Robbins says the only person you can legally hit in the United States is a child. That's wrong.
updated 1:23 PM EDT, Mon September 15, 2014
Eric Liu says seeing many friends fight so hard for same-sex marriage rights made him appreciate marriage.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT