After reading one bearish Wall Street economic report after another, the new Congressional Budget Office budget and economic forecast looks absolutely glowing by comparison. The CBO sees the U.S. economy growing 2.4 percent this year, 2.6 percent next — and then a brisk 3.6 percent through 2016.
One reason financial markets have been relatively sanguine about the debt ceiling negotiations is that investors have been almost certain that something gets done by August 2. Here is what one bank lobbyist told me today:
If the U.S. doesn’t get a handle on federal debt, there will be a financial and economic crisis. By 2035, debt as a share of GDP could be 250 percent, though a panic would surely happen long before that point was reached. But if a crisis came, how would Washington react? What drastic measures would be taken? I think there would be a huge push for a massive tax increase, probably via a value-added tax. Here is some of what the Comeback America Initiative sees happening:
This is the Democratic talking point: Cutting spending by $111 billion, as some Republicans want to do, would cost the economy 700,000 jobs. Now I will admit that I am not sure if those are jobs somehow not created, jobs somehow not saved or what exactly.
Keeping America’s gold-plated credit rating may take both a deal to raise the debt ceiling (which will happen) and a meaningful deficit reduction plan of around $4 trillion (which is not happening). Moody’s says it wants a “deficit trajectory that leads to stabilization and then decline in the ratios of federal government to GDP and debt to revenue beginning within the next few years.” And here is Standard & Poor’s in a report released last night:
So in the end, it was bit of a Ronald Reagan moment for John Boehner on Saturday. Just as the U.S. president walked away from a bad arms control agreement with Soviet leader Mikhail Gorbachev at Reykjavik, Iceland in 1986, the House speaker passed on President Barack Obama’s mega-debt reduction deal in Washington.
The WaPo’s Ezra Klein has cooked up a chart attempting to show previous debt deals had plenty of tax increases in them, even more than what Obama is demanding: