Economix: Debt Fixes’ Drag on the Economy

CATHERINE RAMPELL

Dollars to doughnuts.

As we explained earlier this week, almost every possible outcome of the current debt talks debacle will most likely be bad for the fragile recovery. Macroeconomic Advisers, an economic forecasting firm, has now estimated how the leading proposals for fiscal consolidation — from the House speaker, John Boehner, a Republican, and the Senate majority leader, Harry Reid, a Democrat — would affect the economy over the next decade.

As you can see in the chart below, both legislators’ packages are expected to drag on economic growth, since cutting government spending has ripple effects throughout the economy.

Sources: Macroeconomic Advisers LLC; Congressional Budget OfficeDecline in economic growth, relative to March estimates from Congressional Budget Office.

The economic forecasts are based on the Congressional Budget Office’s scoring of the two legislators’ proposals, including two different versions of Mr. Boehner’s plan. He recently amended his original proposal to front-load more of the spending cuts in order to appease some of his more conservative colleagues.

Even so, Mr. Boehner’s proposal still has smaller spending cuts than Mr. Reid’s, and as a result, it hurts economic growth less.

The new Boehner plan would slow gross domestic product growth by an average of 0.1 percentage point per year for the fiscal years 2012 through 2015. By contrast, the Reid plan would slow growth by about 0.25 percentage point on average during the same period, with the biggest annual drag at nearly 0.5 percentage point in the 2013 fiscal year.

Those drags may sound minuscule, but given the depths of the recession and how far the American economy already is from its full potential, their effects will be painful. And should these austerity measures wreak so much havoc that they actually throw the economy back into recession, the country’s debt problems would actually get much worse, since downturns mean smaller tax revenues.

One important caveat, however: A significant portion of the deficit savings in Mr. Reid’s plan comes from scaling back war spending. It’s not clear how easy this would be to execute, as such military spending cuts would very likely be fiercely opposed by Republicans.

Article source: http://feeds.nytimes.com/click.phdo?i=3a33d3a7137a2cf1f98661cc41ca3aab