Debt ceiling-deficit bill may cost 323K jobs, not rooted in economics
In another showdown between Democrats and Republicans, the country is left with a decision that met the political and ideological goals of a minority of individuals, but makes little economic sense. While it is reassuring that Americans were generally disgusted by the behavior of members of Congress, one can only be so hopeful that it was for the right reasons, at least from an economic standpoint. In the end, the debt ceiling-deficit deal does nothing to create jobs or correct the growing infrastructure deficit, and may end up hurting GDP growth and worsening unemployment.
According to John S. Irons at the Economic Policy Institute, the deal will likely reduce GDP by 0.3 percent, and cost the country 323,000 jobs. The EPI article also included GDP and jobs projections for President Obama’s payroll tax holiday, and the extended unemployment insurance package. If the payroll tax holiday and unemployment insurance provisions are not extended, the EPI estimates that GDP could shrink $241 billion (1.5 percent), along with the loss of almost two million jobs.1
Just a few days ago, the Bureau of Economic Analysis released a report showing a 1.3 percent increase in real gross domestic product in Q2 of 2011. Some of the gains in Q2 from increased investment, slowing imports, and increased government spending were offset by a significant slowdown in consumer spending. Unfortunately, the report also included revised estimates that put growth at only 0.4 percent in Q1, down from 1.9 percent. In addition, the annual revision to GDP said the following:
Today, BEA also released the 2011 annual revision of the national economic accounts. The general economic picture from 2007 to 2010 was not significantly changed. However, the revised estimates show a sharper cyclical contraction in GDP during 2008 and the first half of 2009. Over the six quarters of the contraction, the cumulative decrease in GDP was 5.1 percent, compared with 4.1 percent in the previous estimates.
Although I supported a clean debt ceiling increase and cited statements by credit rating agencies like S&P and Moody’s, Americans should not forget the significant mistakes made with regard to AIG and Lehman Brothers. Just prior to the collapse of AIG and Lehman Brothers, Moody’s, S&P, and Fitch maintained an A or higher rating for both companies. In short, members of Congress should consider the overall ramifications of a credit downgrade, but any debt-deficit deal should not be geared toward the satisfaction of the credit rating agencies, but instead, what makes economic sense for the majority of Americans and the country as a whole.
From the start, President Obama stressed a “balanced approach” to this deal that included a combination of spending cuts and revenue increases. In the end, despite overwhelming public support for both spending cuts and tax increases, the Budget Control Act was completely unbalanced boasting 100 percent spending cuts. In case anyone was wondering, the “savings” did not come from wasteful defense spending, agriculture subsidies, or tax loopholes. The cuts stemmed from the elimination of subsidized education loans for graduate and professional students.
The feeble economic growth and lack of jobs will undoubtedly weigh upon President Obama’s chances for reelection. With the majority of Republican voters unwilling to give Obama an inch, unconvinced Independents, and disillusioned Democrats, Obama’s chances are looking a bit grimmer. Most importantly, the most recent debacle in Washington, D.C. shows that Republicans in Congress are willing to take the country to the brink of economic destruction to achieve specific ideological goals. If that is the case, how can Americans expect to see real action from President Obama and the 112th Congress, outside of tax cuts for the wealthy and more austerity?
- The EPI projections are based on multipliers from Zandi, the CBO analysis of the August 1 Budget Control Act of 2011, CBO economic projections, and analyses from the Joint Committee on Taxation (2010).