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