Here’s one thing I am not worried about: suppose the Bush tax cuts go away, and the budget is cut pro-rata. That would be a good thing. I have always believed in balanced budgets. Yes, restoring balance may be painful for a little while, but the results are usually good after a “big bang,” whether that is a default, currency conversion, or massive privatization.
Why are balanced budgets good? Duh, they are sustainable, particularly if they are done on an accrual basis, which is not the norm. Sustainable government budgets engender confidence in businesses and individuals, because they sense stability, and stability encourages growth. Businessman can plan sensibly, because they have a sensible government.
I don’t think the economy would do badly in this scenario. Hopefully, we would clear out the least valuable programs (I dream), and the taxes raised were not counted on by those subject to the change.
I don’t think this would have a big effect on the US economy. So Congress can’t agree; that is good, because it forces cuts that Congress would never make given their disagreements.
This is the next best thing to a balanced budget amendment. Eliminate Keynesian idiocy, and manage the economy sensibly, balancing the budget as a normal matter, and don’t use government or central bank policy to moderate it, because that only creates liquidity traps like the one we are in. (Need I mention that the Fed should either peg to gold, or that it should only have a a double mandate — bank solvency first, inflation second. unemployment does not figure in, largely, because the Fed has no effect on unemployment.)
Let the economy be free, aside from regulating banks tightly; it will be far better than what we currently have. Regulation of maturity transformation is important because maturity-transformation violates basic asset-liability management rules. We need to force banks not to take interest rate risk. No more borrowing short and lending long. Long-dated lending requires long-dated financing. Organize society for stability, not boffo profits for banks in the bull phase, and huge losses/bailouts in the bear phase.
I don’t care about short-term pain, so long as we end up in a better spot afterward, with better growth prospects.