Paul Krugman And Ron Paul Agree: Debt Ceiling Deal Sucks - Forbes (blog)

"Don't Steal, the government hates competition" says the sign on Ron Paul's desk - RonPaul.com

As markets await a final vote on the debt ceiling deal reached by Democrats, with President Obama as their chief negotiator, and Republicans huddled behind House Speaker John Boehner, experts on both sides of the ideological coin have come out against the new plan.  Nobel laureate Paul Krugman, representing liberals, and Congressman Ron Paul, on the right, both have blasted the new plan for its false promises.

The new Obama-Boehner-Reid plan cuts the deficit by about $2.1 trillion by 2021, according to the non-partisan Congressional Budget Office (CBO).  The first tranche of cuts will total $917 billion, coupled with a $900 billion debt ceiling increase; a special committee tasked with cutting an additional $1.5 trillion will be set up to get the rest of the task done by Thanksgiving.

The truth, according to Rep. Ron Paul (R, Texas), is that there are actually no cuts at all in the new plan.  “The ‘cuts’ being discussed are illusory, and are not cuts from current amounts being spent, but cuts in projected spending increases,” wrote Ron Paul.  With only 2% of cuts taking place before the next presidential election, according to Zerohedge, the truth is that Washington is about to pass “a bigger budget than ever” despite heavy rhetoric, said Ron Paul, who put it like this:

[The debt ceiling deal] is akin to a family “saving” $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda.

On the flip side is liberal economist Paul Krugman, who in his New York Times opinion column called the deal “a disaster.”  Krugman notes that the economics of the plan are completely flawed given that cutting spending in a weak economy will lead to further weakness.  Indeed, it will actually worsen the budget situation, making the economy weaker and reducing revenues.

Krugman thinks Obama conceded too much - newsrealblog.com

“Pay no attention to those who invoke the confidence fairy, claiming that tough action on the budget will reassure businesses and consumers, leading them to spend more. It doesn’t work that way, a fact confirmed by many studies of the historical record,” Krugman writes. The economist notes that given historically low interest rates, “spending cuts now will do little to reduce future interest costs.”

Krugman also had a handy-dandy analogy to explain the deal, taking a stab at Republicans:

So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.

Both Ron Paul and Krugman present alternative scenarios.  Rep. Ron Paul proposes freezing spending at current levels, noting “a simple freeze in spending would be a much bigger ‘cut’ than any plan being discussed.”  The Congressman for Texas explains that with revenues at $2.2 trillion and outlays at $3.7 trillion, freezing spending at current levels would cut $400 billion over the next few years; “it would only take us 5 years to ‘cut’ $1 trillion, in Washington math.” (Read Donald Trump: It’s Time For Republicans To Fix The Country, I Could Be Back In The Race).

Essentially calling the President a flop, Krugman explained that giving in to Republican demands have weakened his bargaining position.  Obama should’ve demanded an increase in the debt ceiling back in December, said the Nobel laureate.  “At the very least, Mr. Obama could have used the possibility of a legal end run to strengthen his bargaining position. Instead, however, he ruled all such options out from the beginning,” said Krugman.

If the most recent deal passes in both chambers of Congress, both parties, and the economy, can let out a cumulative sigh of short-term relief.  Default will have been avoided and maybe even a downgrade could be waived if Standard & Poor’s is feeling generous.  The reality, though, is that there are many problems with the current deal and that the U.S.’ fiscal and budgetary position remains untenable.  Even after a deal, Washington faces a steep climb. (Read Debt Ceiling Ripples Spread To Money Markets, Repos, Volatility).