Confidence Fairies Don’t Deliver and the Most Depressing Part of the Deal

Oh confidence fairy, I wish for economic growth for everyone

Alright, the deal’s effectively done. Up to $2.8 trillion will be cut over 10 years. Holy cash cow, that’s a lot of fiscal discipline in one sitting. It’s like a feast of spending cuts and it’s so emptily nourishing.

So, how did the markets react to our deal? Spending cuts are good for the depressed economy, it’s necessary to get our fiscal ship righted, so Wall Street will… WHAT? Down 0.09% yesterday and long-term interest rates down to 2.73%. But Confidence Fairies, we did everything we were supposed to!  Aren’t the floodgates of The Market supposed to open now?

What’s wrong with you guys? Tell us hedge fund CEO Mohamed El-Erian

The potential budget agreement “does nothing to restore household and corporate confidence. So unemployment will be higher than it would have been otherwise, growth will be lower than it would be otherwise, and inequality will be worse than it would be otherwise.” ABC

Oh. So you guys were hoping for more stimulus all along? Huh.

The Most Depressing Part of the Deal

The most depressing part of the deal is that spending still rises. This is better for the economy than if those bars were declining, but what’s depressing is it was designed that way. Which means the Very Serious People know that government spending is supporting the economy, but still they cut, and say more spending would be a bad thing.

The deal went exactly as President Obama wanted – a middle of the road option. Spending is cut, but not as the Tea Party would have it, hacked into overall decline. Increases just slow.

The deal leaves spending pretty close to normal levels for the next 2 years.

Wait a minute, those bars are rising! Spending isn’t being cut at all.  The “cuts” in the deal are only cuts from the CBO “baseline,” which is a Washington construct of ever-rising spending. And even these “cuts” from the baseline include $156 billion of interest savings, which are imaginary because the underlying cuts are imaginary.

No program or agency terminations are identified in the deal. None of the vast armada of federal subsidies are targeted for elimination. Old folks will continue to gorge themselves on inflated benefits paid for by young families and future generations. None of Senator Tom Coburn’s or Senator Rand Paul’s specific cuts were included.

The federal government will still run a deficit of $1 trillion next year. This deal will “cut” the 2012 budget of $3.6 trillion by just $22 billion, or less than 1 percent. Blergh- I’m citing Cato

While it’s still stupid policy – if your policy is to return the American economy to full-employment, the compromise leaders pulled the same accounting legerdemain on the Tea Party in 2010. The savings found in that deal were not named cuts to subsidies and programs, but changes in budget authority. And overall spending still grew, because defense spending wasn’t cut enough to offset savings found in other cuts.

Now, I think the reason both deals fudge their numbers is because leaders in both parties know that aggregate decreases in spending will do ill for the economy, which almost certainly means they know that government spending has positive effects on a depressed economy. That, in its depressing turn, shows our leaders are purposefully under-performing.

Change we can believe in, winning the future, etc.

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