The "confidence fairy" (among others)

Some normally sensible economists have been seeing images of
what Paul Krugman of the New York Times referred to as the "confidence fairy" in the coffee and perspiration stains recently appearing on their carpets as they sweated over the debt ceiling crisis. It may be an effect similar to that of the "Emperor's New Clothes" except in this case the nervously cheering subjects are afraid to admit to what they see lest they be accused of murdering the confidence fairy themselves. Although he is known to have had his own delusional visions of the stimulus fairy, I must give Paul credit for being a voice of truthful disillusionment in the crowd on this occasion. There is plenty of reason for pessimism.

Just today:

From Steve Goldstein at MarketWatch:

U.S. manufacturing activity barely grew in July, according to a key index released Monday in a demonstration of an economy struggling to expand ... 

and just a couple days before that:

Leading economists on Friday began marking down their growth estimates for the rest of 2011 in response to data showing first-quarter growth of just 0.4% and second-quarter growth of 1.3% ...

So the economy is already showing signs of serious weakening and will not be ready to absorb the cuts in federal spending with the attendant cuts in agency and contractor payrolls. When there is a new 1937-like relapse there may be some unanticipated shock(s) cited as the cause -- but, really, something is always going wrong and hopes for a properly healthy recovery can't be trusted to the good luck of there being less of that than usual. At least one likely source of "unanticipated" trouble would be the climate change fairy. While firmly disbelieved in by many Tea Partyers, there are hints that this one is actually real enough to cause economic harm. Here's another item from MarketWatch:

Allstate swings to loss as catastrophe claims soar
   ...
Allstate Corp. (NYSE:ALL) swung to a second-quarter loss of $620 million on the company's worst quarter for catastrophe claims since Hurricane Katrina struck the Gulf Coast in 2005. Devastating tornadoes across the Midwest and South contributed to $2.34 billion in disaster costs.

Getting back to the deal, just how much confidence have we gained anyhow? It certainly is a relief that we apparently won't have to see another debt-limit drama again this year -- but that is just this year and not very helpful to the kinds of longer term planning that underlies major investments in the real economy. No one knows if the "trigger" will be pulled or what its consequences would be. Should this inspire confidence?

It would be impossible to prove, and maybe this is my fairy tale, but I am pretty sure that the economy would have fared much better if the debt limit deal had not been reached and practically any one of the gimmicky unilateral executive actions proposed to bypass Congress had been used instead. That might plausibly have led to abandonment of the disfunctional debt limit law altogether.