WASHINGTON -- Economists warn that the $85 billion in across-the-board cuts in federal spending set to start taking effect March 1 would stunt growth and slow hiring. Less clear is how long it would take to feel the benefits from the tough-love approach.
The betting is that there’ll be no compromise and the cuts, known as sequestration, will take effect as scheduled. Economists don’t think the reductions are bad enough to shove the nation back into recession. But they also don’t think it’s a rational way to go about reducing the budget deficit, and they fear that it would inflict harm on the economy unnecessarily.
In the simplest of economic terms, the debate is about the benefits or costs of taking the bitter medicine of spending cuts now or taking it later. The looming sequester would cut $1.2 trillion out of $48.3 trillion in spending over 10 years.
“There are benefits to going down the sequester path. But at this point, the negatives outweigh the positives,” said Mark Zandi, the chief economist for forecaster Moody’s Analytics and a frequent witness before congressional committees.
Gauging the near-term impact of the spending cuts is easy enough.
“You are taking purchasing power out of a weak economy, which means in the short term demand is going to decline. Output will decline. You are going to produce less stuff, because people will be less interested in buying it. And as a result of that, you will have lower employment,” said Joe Minarik, a former chief economist for the House Budget Committee and later the White House Office of Management and Budget.
High-profile economists whom McClatchy consulted expect the spending cuts to shave anywhere from four-tenths to seven-tenths of a percentage point from growth this year, most of it during the next six months. The effect on hiring, they said, would be 500,000 to 700,000 fewer jobs by the end of next year than there otherwise would have been.
“There’s no free lunch here,” said John Silvia, the chief economist for Wells Fargo Securities and a former adviser to the presidential campaign of Sen. John McCain, R-Ariz.. “Basically, you’ve gone for many years, long before President Obama came into office, where the federal government was allowed to overspend its budget. Basically we’re on a diet, and there’s no way you’re going to eat like you did before.”
The drag on growth would come on top of the tax increases that President Barack Obama and the Congress approved in a New Year’s deal. Combined, they mean an economy that might have grown this year at a rate of 3.5 percent to 4 percent would instead grow at a rate of 2 percent to 2.5 percent.
So does it follow that government can never cut spending because it would harm employment? No, and the medicine might not take that much time to turn a negative for the economy into a positive.
“From my perspective, that happens pretty soon. I think by 2015 it crosses (into positive). The sheer dollars and cents calculation, it becomes a net positive,” Zandi said. “But that doesn’t account for the fact that you are cutting programs that everyone argues are successful. The impact of that is very hard to measure. All those things that people generally like and feel are effective, you’re cutting them, too. There are a whole lot of intangibles that you cannot measure easily.”