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Clearly, this week’s debt limit deal was better than the alternative — economic catastrophe — but it did not solve the nation’s debt dilemma and it will hurt economic growth and the jobs picture.
Failure to raise the debt limit would have meant the federal government couldn’t pay its bills, would have badly damaged the nation’s creditworthiness and probably would have collapsed the stock market and plunged the economy into a new, deep recession.
It also would have proved what the world already suspects — that the American political system is utterly dysfunctional, that the United States is in decline and that countries ought to start placing their economic and political bets elsewhere.
So Congress and President Barack Obama avoided taking the country over the precipice. But they are still leading the country downward — just more slowly.
Instead of a 777-point decline in the stock market like the one that greeted Congress’ initial failure to approve the Troubled Asset Relief Program in 2008, the market dropped only 365 points in two days as the House and Senate voted on the debt limit.
The message of that is that any hoped-for “confidence stimulus” that a comprehensive, large and balanced debt-solving deal might have produced is not happening.
Why? Because cutting about $1 trillion in federal spending immediately — with an additional $1.5 trillion to come — is “fiscally contractive,” as the investment director of the bond-trading firm Pacific Investment Management Co. put it Tuesday.
PIMCO has downgraded its estimate of U.S. gross domestic product growth in the next year to 1 percent to 2 percent from
2 percent to 3 percent.
Faced with the prospect of slow growth, continuing high unemployment, falling housing prices and low consumer demand, employers are not going to hire. Banks are not going to lend. Corporations are not going to invest.
The danger of an immediate plunge into a second Great Recession may have eased, but the prospect of a Japan-style “lost decade” of anemic growth has increased.
Signing the debt deal into law, Obama called for renewed attention to growth and jobs, but the ideas he put forward — an infrastructure bank, renewed tax breaks for job creators — have little chance of passing.
They smack of more “stimulus,” which the economy sorely needs in the short run but which now has a bad name because Obama’s previous efforts had no lasting effect.
Republicans, under the thrall of the tea party, have completely abandoned any “growth agenda” of the type once advanced by the late Rep. Jack Kemp (R-N.Y.) and President Ronald Reagan. They are interested only in slashing the size of the federal government and barring any increase in government revenue collection.
In the 1970s and early 1980s, when the top tax rate was 70 percent, Kemp and Reagan correctly saw that tax cuts would spur growth. But since then, cutting taxes has become a religion for Republicans — the answer to every economic problem.
And the tea party has made chopping government its religion. The “constitutionalists” were so inflamed that they advocated amending the Constitution to require a balanced budget every year with a limit on outlays — handcuffing the federal government even more tightly than state governments.