Is the debt-ceiling deal hated because it will work, or won’t work?
By James Ledbetter
All views expressed are his own.
As is so often the case when markets drop vertiginously, the explanation you get for what is happening depends almost entirely on whom you ask. There is, for example, a broad consensus that the debt-ceiling deal was a major contributor to the market plunge that kicked in last week.
But, what, precisely, are investors objecting to when they sell in reaction to the debt deal?
To hear the deficit hawks tell it, the problem is that everyone can see that the deal was an effort to delay real decision-making on the U.S. debt. My colleague Gregg Easterbrook calls the deal “as phony as a $3 bill,” and argues that stocks dropped precipitously when “markets learned that people at the top of the government of the United States were going to do nothing at all about the national debt, beyond acting like windbags.”
This view is reinforced by David Beers, the head of sovereign ratings at Standard & Poor’s, the man most responsible for the first-ever downgrade of the U.S. On Monday, Beers told a Reuters interviewer that the agency might raise the U.S. outlook to stable “if the agreement between the administration and Congress, the $2.4 trillion fiscal consolidation package, is implemented in full.”
Yet others think that implementing the package is precisely the problem. In a weekly note distributed by the investment bank Nomura, three analysts outlined what they say would be the harmful economic consequences of the Budget Control Act actually taking effect. They note that if the “sequestration” part of the bill is triggered—that is, if the so-called supercommittee can’t get Congress to agree to its recommendations—that “would result in painful across-the-board cuts in discretionary and direct spending evenly divided between defense and non-defense appropriations.” This, in conjunction with the expiring Bush tax cuts, “could completely broadside the US economy…the defense spending cuts could be especially painful as they would likely force military base closings.”
Isn’t it just as plausible, then, that the market selloff is based in part on fears that the economy will slow down for the next several years, not because of debt but because of attempts to reduce it?
It’s entirely possible that the Gordian knot of the U.S. budget right now makes both assumptions valid, though you won’t find many analysts who endorse both views. We may think of market analysis existing separate from political or economic theory. But the truth is that even the most sophisticated analyses have certain assumptions baked in; what an analyst thinks about the relative merits of deficit spending or deficit slashing can strongly color how he or she sees the market moving.