08/02/2011 09:51 am ET Updated Oct 02, 2011

What's Been Missed in the Analysis of the Grand Deal

The GDP assumptions -- on which the deficit deal is based -- are grossly inflated. Growth slowed to 1.8 percent in the first quarter and 1.3 percent in the second quarter, and it heading toward zero. CBO had predicted 3.1 percent growth for the year.

If the economy is growing more slowly than anticipated, government takes in less revenue. So the cuts in spending will produce far less net deficit-reduction than expected.

The difference between 3 percent growth and zero growth is around a hundred billion dollars in tax revenue, and more payouts in unemployment insurance, Medicaid and other safety net outlays. Faltering growth means that we will hit the debt ceiling again much sooner than anticipated; and that the whole ten year trajectory to reduced deficits is based on false assumptions.

As I point out at The American Prospect, by December when the time comes to execute part two of the deal, further budget cutting will have no political or economic credibility, and all of the deficit hawks who had been predicting that the deal would restore confidence and improve growth will have egg on their faces. In my Prospect column I conclude:

There is one small silver lining. If growth falters, it will be much harder for the super-committee created by the debt-ceiling deal to bring back a plan for deeper deficit cutting. Republican tax-cutting zealots will rebel, and so will Democratic liberals (and other souls who know anything about economics.)

It is even possible--barely--that our brave president, besotted as he is by the influence of deficit hawks and myopic pollsters who think the voters demand budget balance, may grasp that it's time to shift from talk of austerity to recovery. He could lead public opinion rather than chasing it. He could tell the American people that the economy was even weaker than anticipated, and that this is no time for deeper belt-tightening. The 2012 election could be a referendum on growth versus austerity.

Please read the full column here.