The U.S. Federal Budget Deficit is, by definition, enormously stimulative. All deficit spending is stimulus spending. Period. Ergo, cutting deficit spending, or balancing a budget that has been in sustained structural deficit will be enormously contractionary (sp?).
There is nothing to be done about that. When, not IF but WHEN, the budgets are balanced - either via political cooperation OR the international bond market's boycotting future Treasury auctions - the U.S economy will go through a recession that will likely make the 2008-2010 period feel like a prom date.
The question is this: Will this be forced upon us in a less than orderly way by the bond market or will we manage the process. There ain't no more to it than that.
If the new Libertarian/Republicans coming into the House and Senate are serious about managing this process they must take the issue to the mat immediately. If they do not, the opportunity will pass and the international bond market will "do it to it" at some time in the years ahead... if they do take the opportunity... we are looking at U3 unemployment of 15% given all of the federal, state, and local government layoffs with U6 approaching 30%. Talk about a rock and a hard place for politicians.
There is some good news... that unemployment situation would not last long - people will do what they have to do - the U.S.$ would strengthen considerably and interest rates would stay very low, and Oil prices would moderate somewhat.
One way or another, the $1 TRILLION+ budget deficits (stimulus) we've been having will have to be taken down. Pick your poison.