The good news for the equity markets over the agreement to lift the US debt ceiling was overtaken by further doubts about the US and global economy due to the weak ISM manufacturing report that came in below expectations. The index indicated that manufacturing output in the US had barely expanded in July and the subsectors of the index reporting on orders and employment intentions offered little comfort about the outlook for the economy.
The agreement found overwhelming support in the House of Representatives from Republicans, while Democrats were evenly split 91-91. The Senate will undoubtedly follow suit today. The Republicans had successfully held the line against tax increases and the Wall Street Journal described the outcome as representing a new dawn for fiscal outcomes in the US (spending cuts without tax increases) and a triumph for the Tea Party activists.
It is clear that faster economic growth in the US and other debt assailed economies is what is needed. The debate in the US will be how to realise this faster growth. Higher tax rates (on the rich and highly paid) may be regarded by some as only fair but they are surely not good for growth. Extra government spending financed by higher taxes surely crowds out private spending over the longer run. And even when an economy is operating well below its potential the threat of more government spending (and the taxes to follow) may immediately frighten away business and household spending. That the limits to the ability of the Federal Government and of municipal and state governments in the US to raise tax rates have been reached might well be regarded as very good for growth.
Also good for growth everywhere would be reforms of the entitlement programmes that encouraged workers to retire later. Essential too would be to mean test medical benefits for the over 67s (or should it be over 70s?), and in so doing recognise much improved life expectancies. A genuine market place for medical services and for private insurance to cover medical expenses would help greatly to discipline spending on doctors and prescription drugs.
Finding the path to faster growth in the US need not be complex. What it does require is the appropriate political will. The will to resist higher tax rates, has been demonstrated in the US. However the will to pare back entitlements and to rationalise access to them has still to be demonstrated. This debate in the US will intensify as the elections of 2012 approach. President Obama knows his re-election prospects will be much diminished if the unemployment rate does not recede sharply from the current 9%. Unless he can encourage households and especially firms to spend more, he will not succeed in this. He might therefore well become a great deal more business friendly: this would also be good for US growth