Debt ceiling, the euro, the economy

So, I guess liberals are supposed to be really upset about the debt ceiling deal that came out of last weekend to be voted on today/tomorrow. Dave Weigel has a guide to debt deal denunciations while Jonathan Bernstein explains liberal bitterness over the deal. But I don't see what the fuss is about.

In the beginning, President Obama wanted a grand bargain for $4 trillion in debt reduction over 10 years along with some small revenue increases. This deal doesn't have the revenue increases, but the spending cuts are also much less than in the grand bargain. The core of the cuts are something that would have been there regardless of whether or not there were revenue increases; the revenue increases were in there to sweeten the pot for even more spending cuts. The deal convenes a deficit commission that is very likely to pass through some revenue increases, or otherwise trigger automatic spending cuts that are mostly defense spending cuts. And defense spending should be cut at every possible chance: the US spends more on the military now than at any point during the height of the Cold War. See this graph from the Center for American Progress (or this one from the Heritage Foundation). The debt ceiling issue was a stupid, fake problem that only became a real economic issue through political hostage-taking over spending. It could impact the economy in several ways: by forcing a protracted government shutdown or austerity during a time of economic weakness that, by reducing government spending, reduces GDP and provokes a recession; by increassing the cost of financing government debt through a downgrade by the ratings agencies; through a (very unlikely) technical default; or via financial panic caused by any of that. All of these were overblown: only one of the three ratings agencies was ever threatening to downgrade US debt (all such companies have lost credibility following the mortgage crisis debacle, and the market prices of US debt, which are what actually matter, are fine). But the spending cuts in the debt ceiling deal are strongly weighted to 2013 and later, giving only a direct 0.04-0.4% drag to GDP. That's not great, but not apocalyptic absent other problems.

Meanwhile, the US economy is on pins and needles, since there was never a recovery from the last recession. Demand is weak, GDP is well below potential output, and employment never recovered, leading to a seemingly-permanent decline in trend GDP and the employment/population ratio. After the end of monetary stimulus in QE2, the softening economic numbers seem to be headed back towards recession.

And the really worrying problem continues to be the Eurozone. The deal announced July 22 to finally bring Greece into technical default, seems to have helped Greece, Ireland, and Portugal, but the Eurofail seems to be infecting Spain and Italy as badly as ever. As US manufacturing hit its lowest level in two years, the Eurozone is still collapsing.

It looks like the Italy-Germany bond spread is 2011's TED spread, but Spanish 10-year bonds are another measure of contagion.