As I write this, the details are still being worked out. But it looks like the debt ceiling will, in fact, be raised, at the price of a cuts-only deficit reduction plan, with maybe — maybe — some revenue increases in the future. I’m not the world’s greatest expert on political economy, but it’s helpful to remember some basic macro:
Y = C + I + G + NX
That is, national income or GDP (Y) is the sum of household consumption (C), business investment (I), government expenditures (G), and net exports (NX). If you cut G, holding everything else equal, then necessarily Y will fall. It’s possible that cutting G will free up resources that can be more effectively employed in C, I, or NX, but last I checked, there is an enormous amount of slack in the economy in the form of unemployed workers, idled equipment, and vacant office space.
As for the political benefits of cutting G, remember that the single most accurate predictor (PDF) of an incumbent president’s chances at reelection is growth in personal incomes. How likely is it, given austerity budgeting and current economic prospects, that we’ll see a surge in personal incomes by the fall of 2012?
