We’re starting to get the hard numbers on what the debt limit deal, which passed the House yesterday and will pass the Senate today, would mean for the US economy. It’s really not pretty.
Since only a cockeyed optimist would think that fiscal policy is going to be get better than what is dictated in this deal (more likely it will wind up worse, and instead of pivoting to jobs DC will be on auto-pilot, consumed with the debt, the new Catfood Commission and its work), I think JPMorgan’s note on the macroeconomic consequences of the trajectory of the economy is appropriate. This doesn’t mean that the debt limit deal ushered all of this in, but this is an accurate representation of the consequences over the next year of wrongheaded policy in Washington:
Impending fiscal drag for 2012 remains intact. The deal does nothing to extend the various stimulus measure which will expire next year: we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012. It’s possible the fiscal commission could do something to extend some measure such as the one-year 2% payroll tax holiday, though we think unlikely, as it would need to be paid for, which would be tough. If anything, the debt deal may add modestly to the fiscal drag we have penciled in for next year.
Keep in mind that the latest stats show an annualized 0.8% GDP growth in the first half of the year, 0.4% in Q1 and 1.3% in Q2.
EPI has a similar analysis, looking at the $25-$30 billion of deficit reduction cemented in this bill for FY2012, and the failure to extend the two stimulative policies that expire at the end of the year. They also predict 1.5% shaved off GDP in 2012, and the unemployment numbers are eye-popping.
If Congress fails to renew these existing programs or enact improved versions, we can expect slower growth, fewer jobs, and higher unemployment. Specifically, there could be 1.8 million fewer jobs and a 0.6 percentage point increase in the unemployment rate in 2012 as a result of abandoning current budget policies. The national unemployment rate would average closer to 9% instead of trending toward 8%, as projected by the Blue Chip consensus forecast. This means little relief for the 14 million people who are currently unemployed or the many millions more who are underemployed. Roughly one in three workers will be unemployed or underemployed in 2011 and there would be little progress on this front in 2012. This persistent high unemployment not only creates great economic distress for those families directly impacted but also undermines wage growth and continues the erosion of benefits of those still employed. Moreover, these high levels of unemployment make it more difficult to face our fiscal challenges over the long run.
These are the real numbers here. And one reason why they’re so high, a point that should be highlighted more in this debate, is that the deal will not so much cut spending as shift spending onto states that can’t afford to do anything about it. As CBS News reports:
While the details of the spending cuts to states remain unclear, lawmakers from both parties have discussed the need to cut or impose caps on so-called discretionary spending over the next decade.
That could mean wide-ranging cuts in federal aid to states, affecting everything from the Head Start school readiness program, Meals on Wheels and worker training initiatives to funding for transit agencies and education grants that serve disabled children […]
“We have the potential for disaster should there be a major realignment in federal funding that results in a cost shift to states,” said Nevada state Sen. Sheila Leslie, a Democrat from Reno who recently discussed the issue with Obama administration officials in Washington. “In short, we are teetering on the edge right now, and a cost shift could send us over the cliff.”
We talk about discretionary spending in this abstract, antiseptic terms, as if it’s somehow inferior to Medicare, Medicaid and Social Security. It’s really not. These cuts will be extremely deep, and states, constrained by balanced budget requirements, will have to pass them on in the form of additional mid-year cuts. The anti-stimulus from the states has stuck the economy in molasses. And it’s bound to get worse. More from Stateline and NYT.
Some Democrats will react to this be stressing the need to avoid default or a debt downgrade (though hilariously, JPM fully expects an S&P debt downgrade before the end of the year, and adds “we see no major implications for borrowing costs due to the actions of one or more rating agencies”). I will choose to stress the need to protect 1.8 million workers. The cries to stop this deal are only cries in the wilderness at this point.