What a Fiscal Drag

That’s what JP Morgan thinks we got from the debt limit agreement.  They see four consequences of the deal:

 1) No default. This had always been a low probability (<1%) very high cost outcome, which now seems off the table.
2) An eventual S&P downgrade is still more likely than not, though we think this would occur after the fiscal commission completes its task later this year. We don’t think a downgrade is of first-order importance for economic growth: conditional on fiscal metrics such as debt-to-GDP ratios, we see no major implications for borrowing costs due to the actions of one or more rating agencies.
3) No stabilization in longer-run fiscal outlook. A stable debt-to-GDP ratio, commonly associated with sustainable fiscal policy, is not achieved within the ten -year horizon. Thus, this agreement should be seen more of a first step toward sustainability.
4) Impending fiscal drag for 2012 remains intact. The deal does nothing to extend the various stimulus measure which will expire next year: we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012. Its possible the fiscal commission could do something to extend some measure such as the one-year 2% payroll tax holiday, though we think unlikely, as it would need to be paid for, which would be tough. If anything, the debt deal may add modestly to the fiscal drag we have penciled in for next year.
What great news.  I wonder if the Tea Party geniuses have plans for us to shoot ourselves in our other foot.  After, there still is the balanced budget amendment.  Good going guys!

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