Now, Back to the Economy

While Congress completes action on the deal to raise the debt ceiling in exchange for deep spending cuts, the economy is on the brink of a deeper recession. And by the time phase two of the deal approaches, between Thanksgiving and Christmas (whose great idea was that?), members of both parties could be singing a different song.

In phase two, Congress must agree to even deeper cuts recommended by a super-committee, or automatic ten-year cuts will kick in.

But as growth keeps slowing, the premise that a ten-year deficit-reduction deal will somehow restore economic confidence and produce recovery, always dubious, will be revealed as ludicrous.

Instead of the advertised fight about the mix of tax increases versus deeper spending cuts, we could well have a very different debate about how to stimulate a faltering economy.

Democrats will call for more public spending, and Republicans will demand deeper tax cuts -- but at least that debate has the virtue of acknowledging economic reality.

Why should we believe this scenario? Just take a look at the numbers.

As the beginning of this year, the respected Congressional Budget Office (CBO) projected economic growth in 2011 of 3.1 percent. But the actual growth rate will be more like about 1 percent.

In the first quarter, the economy grew at 1.8 percent. In the second quarter, growth dropped to just 1.3 percent. It will almost certainly be lower in the third quarter.

In June, according to the Commerce Department, durable goods orders collapsed. A short-lived boom in manufacturing fizzled. Growth could well be flat by year end.

This means that the GDP assumptions -- on which the deficit deal is based -- are worthless.

If the economy is growing more slowly than anticipated, government takes in less revenue. So the cuts in spending will produce far less net deficit-reduction than expected.

The difference between 3 percent growth and zero growth is around a hundred billion dollars in tax revenue, and more payouts in unemployment insurance, Medicaid, and other safety net outlays. Faltering growth means that we will hit the debt ceiling again much sooner than anticipated and that the whole ten-year trajectory to reduced deficits is based on false assumptions.

The story gets worse next year. CBO projected growth of 2.8 percent for 2012. That is not likely to happen either. For the period 2013-2016, growth is forecast at a healthy 3.4 percent. It is likely to be far less, and of course, cutting spending will only reduce growth further.

In other words, the whole exercise of the grand bargain is built on statistical sand.

There is one small silver lining. If growth falters, it will be much harder for the super-committee created by the debt-ceiling deal to bring back a plan for deeper deficit cutting. Republican tax-cutting zealots will rebel, and so will Democratic liberals (and other souls who know anything about economics).

It is even possible -- barely -- that our brave president, besotted as he is by the influence of deficit hawks and myopic pollsters who think the voters demand budget balance, may grasp that it's time to shift from talk of austerity to recovery. He could lead public opinion rather than chasing it. He could tell the American people that the economy was even weaker than anticipated and that this is no time for deeper belt-tightening. The 2012 election could be a referendum on growth versus austerity.

Of course, it is also possible that I will win the lottery.

But, however audacious it may seem, one must never abandon hope. We do have reality, if not yet the administration, on our side.

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