It is not a very pleasing outcome.
President Obama and more than half the Democrats in Congress reluctantly accepted the lop sided package of austerity measures that the President and his team negotiated with a much tougher and strategically more cunning Republican party. The bill which is complex and about 74 pages in length passed the House with a solid largely Republican based majority.It then passed the senate with support of most of the Democrats and a chunk of Republican Senators. The Republicans using their extreme Tea party faction as a battering ram got almost all of what they had wanted while the Democrats got very little in return. The Congressional Budget Office has evaluated the act as delivering $2.1 trillion in spending cuts over the next ten years with most of them becoming operational in 2013 and beyond. But some $25 billion look like they will occur in 2011 and 2012 when it is certain that the economy will still be mired in high unemployment. The prospect of much more severe cuts in the years to come will chill private sector spending intentions for many months to come.The fact that there is established a 12 person executive committee with the powers to find a further 1.5 trillion in cuts or revenue increases doesn’t help matters because in any case 917 billion in cuts over the next ten years are being implemented and if the committee becomes deadlocked as it very well may, entitlements like medicare will become subject to cross the board cuts. President Obama managed to exclude social security and medicaid from the first tranche of cuts but that doesn’t provide much protection in future negotiations.
As I have stated many times before it is a tragically misguided and misconceived policy choice that can only prolong the high unemployment that still prevails and with the legislation now prohibiting any sort of significant counter-cyclical further stimulus the U.S is now constrained from doing anything significantly positive about lowering unemployment through fiscal policy other than pleading with the private sector to hire people.
Yes we can, seems to have been transformed into no, we cannot.
The very negative reaction of the stock market also shows the futility of listening too closely to the markets when it comes to deciding economic policy. Their attention span is measured in nano seconds and they had already concluded that the U.S. would not default and quickly moved on to fixate on the likelihood of prolonged unemployment and slower growth. It is, of course, a good thing that the debt ceiling has been raised but it ought to have been possible to accomplish this without the unemployed paying such a steep price.We shall see if this stock market decline is a one week wonder as further data becomes available or if it is the beginning of a new bearish phase.