Yeah, So They've Made a Deal

Why does that make me want to run for cover? Here's a story on the kabuki from NYT. It's probably no surprise that I'd be a lot happier if it weren't all about posturing, but that's the government we've got right now. This sucks:

The tentative agreement calls for at least $2.4 trillion in spending cuts over 10 years, a new Congressional committee to recommend a deficit-reduction proposal by Thanksgiving, and a two-step increase in the debt ceiling.

We're pretty much back to square one, from the sound of this. And they still haven't figured out that cutting back on government spending during a recession is a sure way to make it worse. More NYT:

The emerging outlines of a deal to cut spending by at least $2.4 trillion over 10 years, with a multibillion-dollar down payment later this year, would complete an about-face in the federal government’s role from outsize spending in the immediate aftermath of the recession to outsize cuts in the future.

Last week brought the disconcerting news that the economy grew no faster than the population during the first six months of the year, in part because of spending cuts by state and local governments. Now the federal government is cutting, too.

“Unemployment will be higher than it would have been otherwise,” Mohamed El-Erian, chief executive of the bond investment firm Pimco, said Sunday on ABC. “Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.”

He added, “We have a very weak economy, so withdrawing more spending at this stage will make it even weaker.”

Way to go, fellas.

And how is this going to help?

The Republican authors of the debt ceiling deal say that cutting the size of government will increase economic growth down the road because federal borrowing soaks up money otherwise available to private businesses and federal spending distributes that money inefficiently.

Some conservative economists argue that even the immediate impact of a deal could be positive. Classic economic theory holds that people respond to the growth of government by spending less of their own money, because they assume that taxes will increase. A reduction in the federal debt therefore should encourage people to spend more of their money.

Unfortunately, reality doesn't really support that view:

“When you look at the history of these things, the finding is that we shouldn’t be kidding ourselves,” said Paolo Mauro, chief of the fiscal affairs department at the International Monetary Fund and the editor of a book of case studies, “Chipping Away at Public Debt.” “When you do fiscal adjustment in the near term, it does have an adverse impact on economic growth.”

This is pretty much in line with what Krugman, Stiglitz, et al. (that is, people who actually know what they're talking about) have been saying all along. And here's Krugman on the deal.

Start with the economics. We currently have a deeply depressed economy. We will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond.

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further. Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record.

Once again, reality and the Congress are in direct opposition, and the president is showing the leadership we've come to expect, unfortunately. He seems to have developed a real taste for red herrings -- he'll follow them anywhere.

Update: Here's the White House fact sheet on the "compromise." Notice the repeated use of the word "bipartisan." Now we know why Obama accepted it.

Update II.

Matthew Cameron has a nice graphic at Think Progress on where growth is happening -- and where it's not. And in the places that might actually help to revive the economy, it's not.