The truth is that the US is undertaking a tremendous fiscal adjustment. Taking the latest IMF Fiscal Monitor, released one week ago, the US will, after Portugal and Spain, implement the largest fiscal adjustment in GDP terms of any industrialized economy this year.
Even more–since April, the Fund has had to lower its deficit forecast for the US by eight tenths of a percentage point. It is an outstanding achievement, particularly for an economy that is growing below 2 percent year-on-year. Just for the sake of making a comparison, Germany, in spite of allies sanctimoniousness, will go this year from a 0.1 percent of GDP surplus to an almost half a point deficit.
So, these Tea Party ‘debt tantrums’ do not only address a problem that does not exist–they also impose the wrong fixes. The government shutdown, and the sequester, together with all the uncertainty and the ‘tail risk’ they bring with themselves, put the brakes on US capital formation, Research and Development, education, infrastructure spending, and entitlement reform. All these areas are key to long-term growth, sustainable fiscal policies, and supply shocks–precisely, the kind of policies that the self-proclaimed libertarians, pro-free markets, fiscal conservative Tea Partiers should embrace.
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