The White House is already facing fierce criticism from the left over its compromise
with congressional Republicans on extending Bush-era tax
cuts. The proposal, which will cost more than $900 billion over two years, is
intended to reduce unemployment and stimulate economic growth. Now
there's trouble from another constituency: deficit hawks.
In defiance of his party's leadership, Senator Tom Coburn, an Oklahoma Republican who recently voted for a plan
to slash the national debt by $3.9 trillion, told The Financial Times
yesterday that the tax cut deal sends a bad signal to capital markets:
the U.S. isn't serious about combating
its ballooning deficit. Coburn is troubled not by the cost of the
proposed economic package but by the fact that the proposal doesn't include
offsetting spending cuts. Meanwhile, Wednesday, after the tax deal was
announced, U.S. Treasuries suffered their largest two-day sell-off in two years, adding to concerns that bond markets are spooked.
Some commentators share the concern, while others claim it is overblown:
- The U.S. May Soon Become A Real Credit Risk, concludes 24/7 Wall St.'s Douglas McIntyre, pointing out that the rates for America's sovereign debt have risen recently. Tax benefits that fail to spur spending will raise the deficit, he contends, and the gamble that the tax cut deal's cost can "be recouped through spending is a long one if unemployment remains high, consumers remain concerned, and businesses refuse to increase their investment activity because of a fear that the economic recovery is a mirage." The Federal Reserve's low interest rates haven't served as a boon to spending, McIntyre says, so why will low taxes?
- Fiscal Deficits Have Economic Consequences, warns
Simon Johnson, former chief economist at the International Monetary
Fund, in The New York Times: "We cannot afford to blithely increase our national debt. It can be
done--and should be done given the parlous state of our economy and
our disastrously high unemployment levels. But it must be done
carefully, so we get as much stimulative effect on jobs as possible for
our debt-increase dollars." Instead of cutting taxes for the nation's
highest earners, Johnson recommends extending unemployment benefits to people who have been out of work
for 99 weeks or more, refraining from firing teachers, and hiring more
people to teach in community colleges.
- Are Bond Vigilantes Waking Up? asks the economist Nouriel Roubini in a tweet, referring to investors who, concerned about the deficit, sell bonds. The tax deal, Roubini says, is "kicking the can further down the road."
- Yes, They're Stirring, argues
the Economist's Buttonwood blog. The U.S. government must begin
cutting the deficit after 2012, but the tax deal suggests politicians
won't be able to agree on tax increases or spending cuts. Or, more colorfully: "American politicians of both
parties are still feeding chocolate to the electorate and getting them
onto a gruel-based regime looks harder than ever."
- Fear Not Bond Vigilantes, writes
Paul Krugman at The New York Times. Yes, U.S. long-term interest rates
have risen in the past couple days, but they're only at June levels and
they rose because people believe the tax deal's short-term stimulus
will prod along economic recovery, not because bond vigilantes are
moving markets. He adds, though, that maintaining the Bush tax cuts
does raise the specter of a fiscal crisis.
- And Rising Bond Yields Can Mean Different Things, cautions
the Economist's Free Exchange blog: True, "they could point toward debt
or inflation worries," but they could also "signal an easing in market
fear. And they could also reflect rising interest in private investment
opportunities." Since stimulative measures in the tax deal, like the
payroll tax cut, were a surprise to markets, Free Exchange reasons that
the jump in yields was largely due to the inclusion of these
components in the proposed package.