Deal on Spending and Debt Ceiling Is Good News for Economy

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 23, 2019 1:09:27 PM

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debt ceilingThis morning’s announcement of the deal between Congress and the White House to suspend the debt ceiling for the next two years is undiluted good news. With an agreement that the government can borrow to spend the money that it has already committed to spending, we can avoid a totally unnecessary, politically driven crisis that could have caused real economic damage. Assuming the deal actually gets passed and signed, it would remove the only near-term roadblock to continued expansion here in the U.S. Like I said, this is definitely good news.

Also positive news (although not purely so) is the fact that the deal would eliminate the pending mandatory spending cuts that were to take effect next year. Legislation from 2011 imposed those cuts, but the current agreement would allow continued spending at current levels plus. Although it is being described as "additional spending" of $320 billion, it looks to me more like avoiding a cut of $320 billion. Any way you look at it, however, the effect on the economy will be positive. With growth slowing, a cut of that magnitude would certainly take us close to recessionary growth levels. There are still real worries about the deficit, in the next year or so, but this news on spending is also good.

Confidence boost

There are other takeaways here as well. The biggest from an economic perspective, to my mind, is that despite the real worry around the debt ceiling and other factors, a deal did get done in a more timely fashion than we saw in the past. Worry can be a positive force, if it drives corrective action as it did here. More, by removing both the debt ceiling and spending cut worries, the deal frees up both consumers and businesses to move forward. This freedom should help keep confidence high, which is a critical driver of economic growth.

A political win

Politically, there are also some important points to consider. First, assuming the deal passes, it shows there is no real constituency for cutting spending. The deficit has now more than doubled since 2016, and it will pass $1 trillion next year. Although there will certainly be pushback from some Republicans, worries about the deficit and the debt are no longer driving policy. This shift is not much of a change, in real terms, but the perception will now be radically different. This presumption of more government spending could also help support confidence and growth.

Second, by stabilizing spending policy and likely the economy through the remainder of this presidential term, it potentially takes away a key risk from both sides during the election campaign. The White House can count on a stronger economy and no shutdowns, at least on budget issues. The Democrats can run a campaign on a win on spending increases. This deal makes sense for both sides.

What’s missing?

Although there are multiple benefits to the deal, however, they all center around spending in the short term. What is missing is an accounting of the costs over time. This area deserves more of a discussion, which it won’t get in the aftermath of the deal. But those costs will be real and substantial—tomorrow. Today, though, the news is good.

Now on to worrying about Brexit!

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