Debt-ceiling deal

The deal between President Obama and Congress to raise the federal debt ceiling could avert a financial crisis but also would threaten to aggravate the basic problems facing the U.S. economy, including a stubbornly high unemployment rate and weak demand.
The agreement could immediately lift the cloud of uncertainty over the economy. It would end a political stalemate that could have caused the United States to default on its obligations for the first time. Over the long term, the deal could help free the nation from what is fast becoming a crushing debt.

But, many economists say, the agreement could endanger the anemic economic recovery — because of both what the deal includes and what it doesn’t. The government would cut back on spending that has softened the blow of the slowdown while failing so far to renew measures, such as a payroll tax cut, that have put money in consumers’ pockets.
The debt deal represents a striking reversal from a year ago, when jobs were atop the government’s agenda and both parties were arguing over who had the best plan to increase employment. But even as the agreement threatens to tamp down growth this year and next, it doesn’t go nearly as far as financial analysts and some senior officials had hoped toward reining in the national debt later this decade.
In short, some economists warn, deficit savings are too modest in the future and too severe in the present.
The agreement would mean the government now has less money to provide employment opportunities for the 9.2 percent of Americans looking for jobs. It would likely cut aid to states, whose own cuts are contributing to the weak economy, and eliminate at least $350 billion from the defense budget, prompting layoffs at government contractors.
Americans would also have less money to spend next year because the president failed to persuade Congress to extend a 2 percentage-point payroll tax cut and unemployment insurance. Obama has frequently cited those measures, put into place in December, as important in offsetting sharply higher fuel and food costs.
“Why would you want to impose restraint on an economic recovery that’s already fragile?” asked Josh Feinman, chief global economist at Deutsche Bank Advisors. “You’re removing spending power from the economy at a time when it needs it. That’s likely to make the economy weaker.”
Feinman added that a slowing economy would actually set back efforts to curb the debt. “If the economy gets weak, the budget gets weaker, because tax revenues are going to slow,” he said.
The latest sign of the slumping economy came Monday, when a key report on U.S. manufacturing showed fresh signs of weakness. The U.S. stock market, which was up on the news of a debt deal, immediately erased the gains after the report came out, ending the day slightly down. Yields on Treasury bonds have also remained low, partly reflecting investor concerns about the health of the economy.
The economy has been losing steam all year, and job growth has essentially stalled. Under these circumstances, most economists warn against cutting government expenditures at a time when the private sector is not spending enough. Many economists have called for additional federal spending to stimulate growth.