Cuts? What cuts? (US edition)

Reactions to the US debt deal range from the exaggerated to the downright hysterical. Republicans are bragging about putting an end to Washington's culture of spending, even though the agreed spending cuts are back-end loaded to such an extent that they will almost certainly never happen. Media pundits are overstating the likely macroeconomic impact, as per this headline from Bloomberg: "Debt Agreement Puts U.S. on Path to End Stimulus Just as Economy Falters". In a similar vein, one Wall Street investment house has warned that the US is switching "from massive stimulus to massive restraint".

Over on the left there's anguish. Democrats lined up on the floor of the House and the Senate to stress how much they hated what they were about to vote into law. Pundits are even more distressed: David Weigel on Slate calls the deal a "generational defeat" for the Democrats, while on his blog, Paul Krugman sounds totally disillusioned: "It’s much, much too late for Obama and co. to say 'Trust us, we know what we’re doing.' My reservoir of trust is now completely drained. And I know I’m not alone".

This deal only ever got done because absolutely none of these things is true.

It's important to realise that there are, in the aggregate, no actual spending cuts here. Sure, some programmes may get axed down the road -- and remarkably, given the final package was supposedly dictated by the Republicans, big ticket defence projects seem to be squarely in the firing line. Overall, however, all that has been agreed after all of the rhetoric and wrangling is a path to slow the growth in US Federal spending over a ten-year horizon. The US Government will still be spending more with each passing year -- just "less more" than was previously projected. As Bill Gross at Pimco points out, on reasonable GDP growth assumptions the US will still be running deficits of 7-8% of GDP by 2018 -- ten years after the onset of the financial crisis.

The fact that virtually none of the spending "cuts" will take effect before the November 2012 Presidential election ensures two things. First, the growth impact of the spending cuts in the near term will be nugatory. The US economy may well head back into recession in the coming quarters -- that seems to be what stock markets think, anyway -- but it won't be because of anything decided in Washington this past weekend. Secondly, almost none of the envisaged cuts will actually happen. As Larry Summers and others have pointed out, this Congress and President can't control the actions of their successors. Experience in the US and elsewhere shows all too clearly that long-term spending reduction plans never pan out.

Amazingly, then, I find myself with two altogether unaccustomed bedfellows here: Michelle Bachmann, who has said ad nauseam, but undoubtedly correctly, that the deal just "kicks the can further down the road"; and (gulp) Anatole Kaletsky, who writes in The Times today (paywall protected) that contrary to the consensus, President Obama came out on top in the negotiations. I hope Paul Krugman has a Times subscription.