Mark Zandi Thinks The Deal Will Be Great–Is He Lost In Space

Mark Zandi, Chief Economist of Moodys in a CNN interview, stated that the “debt limit deal” is amazing and really great and will solve all of the economic worries of our country and get our economy back on track. According to his effusive rant he said that all the private sector needs in order to restart hiring is the “deal.”

He ignores that consumers have cut back on spending, the government spending cuts have a negative impact on the economy and state and local governments and the housing market is in the tank.  Unbelievable, but true.

Most economists and prinicipal financial leaders agree that immediate reductions in spending will have a bad impact on our economy.

My friends, prepare yourselves for a multi-year stagnation in unemployment and growth in the US economy.

What Economists Are Saying About Today’s Bad GDP Numbers

In other words, pushing more spending no matter what.  The Fed such pump out more money into the economy.

Balancing the budget or cutting spending will hurt the economy even more than it is now.

In the first six months of 2011 real GDP grew at an annual rate of only 0.8% per year. At that growth rate, unemployment will rise at about 1 percentage point per year.

I need to see the guts of the numbers, but unless there is something very odd in them, the chance that the unemployment rate will be above 9% in November 2012 just crossed 50% heading upward.

A rational Federal Reserve would:

Begin QE III today.

A rational administration would:

Announce a technical fix to the debt ceiling today: the economy does not need the risk.

Abandon all long-term budget negotiations with anybody who requires cuts to the deficit over the next eighteen months to come to the table: the economy needs stimulus, not contraption.

Take every single uncommitted TARP and TALF and whatever dollar, leverage it up, and throw it at the economy to boost aggregate demand.

via Much Worse GDP Numbers than I Had Expected.

Why A Permanent Balanced Budget Is Policy Nonsense

Simple.

A balanced-budget, instead of being countercyclical (spending is increased in a recession to expand the economy), is pro-cyclical (spending is cut in a recession and increased in a growing economy).  Countercyclical policies counters inflation, unemployment and slow growth, while pro-cyclical makes deflation and inflation worse, increases unemployment in a recession, reduces growth in a recession and pushes growth when it is not needed.

A balanced budget amendment takes economic policy out of the hands of government—not a good result by making business cycles worse.  Policies become exactly backward to what they should be.  Nevertheless, you can reduce government debt through spending and revenue changes, but not just spending without gutting publically-favored social safety net programs.

Economic Growth is Uncertain, at the Least

An objective view of the future of the US and other developed countries suggests more challenges rather than fewer ones.

Perhaps for the first time in modern history, the future of the global economy lies in the hands of poor countries. The United States and Europe struggle on as wounded giants, casualties of their financial excesses and political paralysis. They seem condemned by their heavy debt burdens to years of stagnation or slow growth, widening inequality, and possible social strife.

via The Future of Economic Growth – Dani Rodrik – Project Syndicate.

I Forgot About The Balanced-Budget Multiplier

A view simple concept–if you expand government spending and taxation by the same amount, then there is an equivalent increase in national income. Hence, there is more income, but not more national debt.  Great!

I wrote about the concept of the balanced-budget multiplier and of raising taxes and government expenditure by the same amount, dollar for dollar. These ideas were first put on the national stage in 1943 by Paul Samuelson, the Nobel laureate. He argued that such a policy would be one-for-one expansionary: each dollar spent is a dollar of new national income. As long as interest rates are near zero — as they were then and are now — there should be no “crowding out” of private expenditures by government ones.

This is an expansionary change in fiscal policy that won’t require additional increases in the national debt. We should start a dialogue right now about taking such action, before the damage of protracted unemployment worsens.

via Tax and Spend, but Keep Your Balance – Economic View – NYTimes.com.