No Good News
3:00 PM, Aug 5, 2011 • By IRWIN M. STELZER
None. That’s the total of on-the-other-hand good news I have to report this week. Lest you think I am overlooking the debt deal cut in Washington last week, consider this:
♦ The deal did not prevent default, because default was never going to happen: The Treasury had plenty of cash with which to pay interest due on our debt, and would only have had to prioritise other payments.
♦ The deal will not reduce America’s debt. The debt ceiling has been increased by $2.4 trillion, and that will only hold us into 2013. The so-called spending cuts are reductions in the scheduled increase in discretionary spending. Americans will wake up ten years from now another decade older and deeper in debt.
♦ Current projections of future deficit reduction are based on the heroic assumption that the economy will grow at an annual rate in excess of 3 percent this year—an impossibility given the miserable first half of the year. Forecasts for future years rise steadily into the 4 percent range. Those projections by the Congressional Budget Office and the Office of Management and Budget are up for review next week, and revisions will undoubtedly result in lower estimates of tax revenues, higher estimates of such costs as unemployment compensation, and an increase of trillions in the projected 10-year deficit.
♦ The deal does not assure that America will not be downgraded: The cuts are too small and there is no provision for producing a long-term sensible fiscal policy. [UPDATE: The deal did not prevent downgrade: The cuts were too small and there is no provision to produce the long-term sensible policy that Standard & Poor's is demanding.]
♦ The deal did nothing to restore confidence in the American political/economic system. Christine Lagarde, new head of the International Monetary Fund, says that the fiasco that preceded the deal is “probably chipping into that very positive bias … towards the United States of America, towards Treasury bills.” Vladimir Putin accused America of living like “a parasite”—a charge that would have President Obama and Treasury Secretary Timothy Geithner sentenced to the Gulag in the good old days of the Soviet Union. And the Chinese regime, eager to find an alternative to treasuries in which to stash the trillions in the ill gotten gains of their policy of currency manipulation but unable to do so, accused the U.S. of destabilizing the international economic system, while Dagong, its rating agency, downgraded U.S. securities to A, the rating it assigns Russia, South Africa, and Estonia.
That’s just one bit of bad news. Here’s more.
The economy couldn’t manage even one percent growth in the first half of the year, and most forecasters are scrambling to lower their forecasts for the rest of this year and next. Share prices are dropping like a stone. The manufacturing sector, until recently a source of growth, has lost steam, with new orders declining, a bad omen for the second half of the year. The service sector “has shown a clear loss of momentum,” say economists at Goldman Sachs. Consumer spending in June dropped by the largest percentage in two years, as wages and salaries fell and consumers stepped up their saving rate against the day when they might have to join their aunts, uncles, and neighbours on the unemployment queue.
Paradoxically, all of this is made worse by the debt deal, which tightens fiscal policy in the short-run, and leaves the future of the nation’s finances in a some-day-we-will-do-something stage. Tightening now, loosening down the road: The precise opposite of what a staggering, debt-ridden economy needs. Some economists estimate that the deal will cut between 0.1 percent and 0.3 percent off growth next year. But since no Congress can promise that some future Congress won’t reverse any spending constraints the current members agree on, there seems no sure way credibly to promise that the next Congress will not resume its stroll down the path to national penury. Those who believe that a constitutional balanced budget amendment will do the trick should recall congressional ingenuity—the cost of the recent census, mandated in the Constitution, was declared an unexpected emergency by a Congress intent on piercing a spending ceiling.
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