The Deal doesn't matter

    By Flavius on Tue, 07/12/2011 - 3:07pm |

    Larry Summers today at Brad Delong

     The truth is that the expected impact of the deal over a 10-year period will not be its most important aspect except in the context of the current media cycle.... Agreements reached now are subject to revision, potentially radical revision following next year’s election.

    So why are we rending our garments here  over Obama's debt ceiling strategy? Beat's me. What matters are the actions that some president will be taking in 2013.

    A great debt deal now followed by Pawlenty in the 2013 White House would be a disaster. A terrible deal now followed by an Obama re-election means the opposite.

    While he was at it Summers casually added another truth.

    Businesses are basing their investment decisions on the size of their current order books, not their guesses of fiscal policy in 2015.

     

    Or put another way ,what affects Corporate America's hiring decisions is its current projection of the next quarter's EPS.

    Comments

    I think that is this a fair counterpoint to those who are worried that the results of a deal will wreck the economy, but I submit two caveats:

    1. Even if the deal doesn't negatively effect the economy in the short run, it distracts us from addressing a weak economy right now--which as miguelitoh points out, will have a bigger impact on the deficit than any spending or revenue changes.

    2. I think that the debt deal has mainly served as platform for addressing larger issues about the role of the federal government, which has fueled most of the debate.


    by Michael Wolraich on Tue, 07/12/2011 - 8:27pm

    Yes


    by Flavius on Tue, 07/12/2011 - 9:13pm

    I don't know.  It seems to me that if people are convinced they are going to have less Social Security and less Medicare ten years from now, a lot of them are going to shift even more of  their income from consumption to savings right now.   After all, that was one of the big results of the evaporation of retirement assets, which also weren't due to be paid out for most people until some time in the not-to-near future.  People treat these programs as money in the bank, and the rational response to a loss of savings is to save more.

    And business's current investment and hiring decisions are based on current estimates of future orders.  Anything that persuades businesses that their customers' disposable income will be contracting - including due to increased household savings - will dampen business confidence and investment.


    by Dan Kervick on Tue, 07/12/2011 - 10:06pm

    You could be right about individual motivations. Certainly I have no basis for disagreeing.

    As for businesses' hiring  or firing., That's pretty much  unaffected by media(or economists') chatter about the projected trend in the deficit. That goes into the My Eyes Gloss Over pile.  Certainly doesn't affect hiring.

    Sure it might have an indirect  effect on operations............ unless something happened to change it. Which usually does.

    But so would a bunch of unforcastable things from wars to tsunamis.

    What does affect hiring  is forecasted short term profit..Every company has a forecast  for  the next 12 months , revised  quarterly and tweaked monthly. And just about every CEO knows on the first day of the quarter what his EPS will be, From operations or book keeping

    .Decisions on hiring or layoffs  are based on the forecast of the following couple of quarters.   .


    by Flavius on Wed, 07/13/2011 - 5:52am

    Right, I agree that business forecasts have nothing to do with the federal deficit.   But they are based on estimates of consumer demand, and consumer demand is dependent on consumers' level of disposable income.  If the government pursues policies that are likely to result in consumers having less income to spend, businesses are usually able to see that fairly quickly, and adjust their plans accordingly.


    by Dan Kervick on Wed, 07/13/2011 - 7:44am

    Agree that if all or at least some major portion of the Republican nonsense were actually implemented that's what would happen.

    But CEOs I knew (remember I'm long past it) evinced a sort of schizophrenia. Ask them (they wouldn't volunteer a comment) and some some large % would nod heads sagely and say they agree with Eric Cantor. "Fine fellow."

    And they can count. So you'd think they'd draw the same conclusions as you. But they don't.

    What they actually do is wait and see. Which on the whole is a lot smarter than acting as if we were about to be Cantorized. Might explain why they're CEOs.


    by Flavius on Wed, 07/13/2011 - 9:14pm

    Obama is offering just as much nonsense as the Republicans.  They are both talking about sucking money out of the economy with a new austerity budget.   That's just dumb in the present context.   Maybe its clever politics.  But it's dumb and irresponsible public policy.


    by Dan Kervick on Thu, 07/14/2011 - 1:26am

    yes


    by Flavius on Thu, 07/14/2011 - 6:53am

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