Valliere: A GOP Conspiracy to Weaken the Economy?

After analyzing Washington for 35 years, it’s excusable to be a cynic.

Actually, it’s mandatory.

So let’s try out this extremely cynical premise: the Republicans are deliberately refusing to help unemployed workers or aid the states because they undoubtedly know this will hurt the economy further – and an ailing economy will help their prospects in November.

I can just feel the hate mail revving up. But bear with me for a minute.

By refusing to grant any extra aid to the states – or to even speed up Medicaid payments to the states – the inaction by Congress unquestionably will prompt layoffs in dozens of states that have new fiscal years that start on July 1. By refusing to grant any additional unemployment benefits this summer, 2 million unemployed Americans will sink even deeper into poverty.

US Capitol Building with cash
US Capitol Building with cash

This brutal austerity, now all the rage in Congress, could not come at a worse time.

As I wrote here a couple of weeks ago, it’s similar to what crackpot doctors did 250 years ago to an ailing patient – let’s apply leeches, let’s bleed them !!

That doesn’t work for ailing patients or a fragile economy.

Why this sudden passion for frugality?

It certainly can’t be to appease the bond market, which has sent interest rates to unprecedented lows. Why have rates plummeted? Because the bond market correctly perceives a growing risk of a double-dip recession. And why is a double-dip recession a genuine risk? Because the politicians have decided to impose austerity at exactly the wrong time.

Obviously, the U.S. and most industrial countries (especially Japan) have a deficit problem. I would argue loud and long that deep spending cuts — including entitlement reforms — should occur once the economy stabilizes. But the proper prescription now is obvious: more spending, a continuation of the Bush tax cuts, free trade policies. In other words, vastly more stimulus is needed.

That was the key takeaway from the 1930s, wasn’t it?

Fast-forward to this summer. Hundreds of thousands of jobs could be saved before Congress leaves for the July 4 break, but the Republicans won’t lift a finger.

What’s a cynic to think? Could it be that a persistently high unemployment rate will make their gains even greater in November? Would Republicans be disappointed if the economy stays weak through the election?

I think not.

Greg Valliere is Chief Political Strategist at the Potomac Research Group, a Washington-based firm that advises institutional investors on how government policies affect the markets. Greg has covered Washington for over 30 years, starting his career as an intern at The Washington Post, then co-founding The Washington Forum in 1974 to bridge Wall Street and Washington. He has held several positions, including Director of Research, for Washington-based firms, including the Schwab Washington Research Group. Greg is an exclusive commentator for CNBC-TV, where he appears regularly on most of the network’s programs.