Dangers for the Economy Loom: Budget Cuts and Fed Inaction

Jonathan Chait argues that Speaker Boehner has no choice but to shut down the government because the Tea Party won't let him compromise with the White House and Democrats.

Politico's David Rogers updates on the latest in the budget wrangling. The facts on the ground seem to confirm Chait's thinking:

For Boehner, the great challenge is to hold his party together for a final deal and the GOP is still pursuing a strategy of first maximizing its Republican vote before reaching out to House Democrats.

Aides dismissed suggestions that there is already an active campaign to solicit moderate Blue Dog lawmakers-however much their votes may be needed. Instead the leadership feels it must prove its loyalty first to its large, conservative freshmen class, since even tougher party votes lie ahead this spring with the debate over the 2012 budget and raising the federal debt ceiling.

Eric Cantor seems to be having a very difficult time with these budget negotiations, so difficult that he has no idea what's actually going on.

David Leonhardt writes that the Federal Reserve is consistently overestimating both growth and the likelihood of inflation, and has therefore done too little to address unemployment. He explains why:

Why is this happening? Above all, blame our unbalanced approach to monetary policy.

One group of Fed officials and watchers worries constantly about the prospect of rising inflation, no matter what the economy is doing. Some of them are haunted by the inflation of the 1970s and worry it may return at any time. Others spend much of their time with bank executives or big investors, who generally have more to lose from high inflation than from high unemployment.

There is no equivalent group - at least not one as influential - that obsesses over unemployment. Instead, the other side of the debate tends to be dominated by moderates, like Ben Bernanke, the Fed chairman, and Mr. Meyer, who sometimes worry about inflation and sometimes about unemployment.

The similarities between the budget battle and limited action by the Fed are striking. In both cases, priorities are being misplaced because of a lack of political gravity on the side of unemployment and growth, so almost theological fears of inflation and the size of government are winning the day. And, in both cases, the frightening severity of current economic conditions - high unemployment, weak demand, a weak housing market, rising energy prices, global instability, and the aftermath of the Japanese earthquake and tsunami - are not being fully accounted for.

At least in the case of the Fed, inflation hawks have an actual policy case. In the case of the budget battle, however, there's zero chance that the GOP's cuts will create jobs or growth or address the national debt.

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