State of the US economy, June 3, 2011

Paul Krugman points to a Goldman Sachs analysis of the effects of the stimulus...it was hugely positive in pushing growth early on, but as it winds down and projects completed, growth has stalled.

If government spending (stimulus) had been slowing down, and growth is now reflecting a slow down, then what happens when Republicans get their massive government spending cuts? One word: Ireland.

One country cut government spending (and has continued to slash spending as their economy continues to drop); the other country had a stimulus program that was modest in scope, as a percentage of GDP, compared to other nation. In short order, that other country is about to cut spending, and around that point, the US unemployment will expand rapidly.

Stocks dropped on the jobs report showing a measly 54,000 jobs added, nearly mirroring ADP's job report the other day. Consequently, the 10-year US Treasury Bond rate also dropped, down to 2.99%.

So the argument for deficit cuts has been laid out as thus: cutting government spending will end the crowding out of private spending, and it will prevent runaway inflation (driven both by debt fears and higher costs of employment). But both interest rates and bond rates remain low, therefore no runaway inflation, no debt-driven fears. There isn't much room for mistake here...choose the wrong path and the US economy goes from tepid to bad, in a few months, if that.

If you're going to pick the Republican Way, you better make damn sure you know WHY you're picking their plan, and you better be damn sure you can explain it to others.  If you pick the wrong side, you have to assume part of the blame if things go very bad.