A deal to raise the federal debt ceiling is in the works. If it goes through, many commentators will declare that disaster was avoided. But they will be wrong.
For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.
Where I disagree with Krugman is in the details. This package has to be reviewed this fall. On the same date that the Bush tax cuts (extended two winters ago) expire. That will immediately raise revenues, and lower the deficit tremendously. In this, it seems, Obama gets to keep his campaign promise (two years too late, of course) of eviscerating those horrid cuts.
Disaster avoided? Maybe. Maybe not. Certainly Krugman is right to point out that the last thing we need right now is spending cuts (unless they're carefully targeted, like farm subsidies for corporate farmers) and the long term effects to the economy could be irreparable if Obama is unable to persuade Congress (absent Boener, of course) that the tax cuts must die.
The inference from reading the reactions of various House leaders indicates to me that the crux of this deal with Obama is the death of the Bush cuts. Yes, he gives up stuff first, and so there's no promises or guarantees that he is ultimately successful in his pursuit of this goal.
On the other hand, it sure looks like the political kabuki I've been talking about has taken form.