President Obama has done the right thing in signing approval for $85 billion of cuts in US public spending. He is still playing a blame game with the Republicans over who is responsible, but it is his signature on the order. Maybe the only way a democracy can order any cuts in public spending is by blaming someone else for them. It takes a real borrowing crisis in the markets otherwise to create the conditions for real cuts, as in Sweden and Canada in the past. Apparently Mr Obama would rather increase taxes a bit as well as cutting spending. Both reduce demand in their first round effects, so I can’t see how his preferred option is better.
Whilst cutting spending, the President claims that the cuts will be damaging to growth and jobs. He forecasts half a percent off the US economy as a result. It will be interesting to see what happens. I suspect the US economy will keep on growing this year, despite the cuts or because of the cuts. The cuts have clearly got the support of the markets. The many individuals and companies who have expressed their view this week by buying or selling securities approve of the cuts. The US Stock market has gone up, and US bonds have been fine.
The US economy is growing again because they have mended their banks. The commercial banks can lend on the money being created by the Fed. It is growing thanks to shale gas and cheap energy. It is growing thanks to its strong enterprise sector and its good technology. The lost public sector output should be replaced by private sector output in these conditions. More importantly, the fact that the US is seen to be tackling its deficit and future debts is good for confidence, the magic ingredient in any recovery.