Wall Street also no longer deserves its reputation for wanting deficit reduction all the time. The “bond market vigilantes” that were evident during the Clinton administration now have become the Bigfoots of the U.S. economic debate — much talked about but without any proof of existence.
On the contrary, the Wall Street CEOs who issued an open letter to the White House a few weeks ago demanding that the fiscal cliff be avoided and the deficit be higher than it otherwise will be under current law, as well as the investors who caused the market to rally Nov. 16, have made it clear that, if they ever actually existed, the bond market vigilantes of the 1990s were an exceedingly rare species.
The third budget fairy tale the fiscal cliff has now shown to be make-believe is the much- repeated concept that federal spending isn’t good for the economy and spending cuts will have no negative consequences.
Much of the debate over the fiscal cliff has been about how the spending cuts that are scheduled to occur on Jan. 2 will result in thousands of private and public sector layoffs. We also have projections from the Congressional Budget Office and Wall Street that unemployment will increase to more than 9 percent. That’s the opposite of the benign or even positive economic effect some have been saying federal budget cuts have no matter when or how they are made.
The sad part is that there’s been very little admission by those involved in or commenting on the fiscal cliff about how it has shown many of the previous assumptions about the federal budget to be wrong. No matter what happens, changing this should be one of the goals of the debate. Otherwise, whenever this crisis has passed, the debate will go back to being dominated by the same lies that have made the current situation so difficult to deal with.