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By Steve Levy

Two Positives from the Debt Ceiling Debacle

Uploaded: Aug 3, 2011

The debt ceiling debate and final agreement shows how screwed up our congressional politics is. There was no discussion of entitlement reform or tax reform, no inclusion of any kind of balance in terms of solutions and the level of long-term deficit reduction is far too small to make much of a difference.

The first tiny positive is that the final agreement is better than a refusal to raise the debt limit.

The public debate was filled with tired rhetoric about "job killing" tax increases and the "terrible blows to our seniors" if Medicare and Social Security were reformed modestly. For all the talk of compromise no one changed their ideas much to my listening.

The other positive is interesting.

In recent days we now hear the language (and correctly) about "job killing" spending cuts. We are reminded that government spending supports jobs and income just as consumer and business spending does.

The media this week has reported on the large impact of federal spending on jobs and residents.

Government spending cuts "kill" jobs in the short term just as redcutions in consumer spending or busienss investment. Reduced spending on federal grants for transportation, research or community prorgrams takes money out of the economy just as local government spending cuts are leading to reduced jobs and income in those communities. The federal government provides well over $200 billion to the California economy in the form of matching grants for health and social service programs, support for college students and our universities, payments for Social Security and Medicare and infrastructure funding.

While we can debate whether all of these funds are wisely used (Weekly bloggers recently got support from an independent panel re the problems with HSR funding), it is still true that lower spending leads to fewer jobs and less income.

Consumers are tapped out and caught between depressed housing values and high unemployment. To expect a surge in consumer spending is unrealistic for a while.

Businesses have plenty of money and profits and are spending for productivity increases and, especially here in Silicon Valley, to develop new products and services to catch the next gold ring.

But to expect businesses to invest in expanding capacity and adding jobs in most industries is also unrealistic and would be bad business practice given the current state of low demand from their customers.

We are really stuck with few tools in our tool kit, even if our politics were not so messed up. There was no thought of economic recovery policies in the debt debate on either side.

But cutting government spending now will only deepen and prolong the economic pain.

Government spending does "kill" jobs in the short term just as advocates argue is the case for tax increases.

The best advice is still support the economy and safety net now (which used to be an area of bipartisan agreement) while commiting to substantial reductions in federal deficit spending starting when the economy recovers.

The debt deal this week did neither.