Debt ceiling deal: What’s the impact on the economy, ordinary Americans?

By Bob L.
8/1/11

There are a lot a questions that this article brings up, like if they cut Government spending, how could that make job recovery worst then what it is now, or is it just a way to go back to the same old Government spending.

Just how much more are they going to cover up that they don’t want the people to know.

This picture of the two look awfully chummy, all most like they are hiding some thing.

Debt Ceiling Deal: Almost No Spending Cuts Before 2014

WASHINGTON (AP) — The first phase of a deal to raise the government’s borrowing limit would pose little threat to the economy in the short term because almost none of the spending cuts would occur before 2014.
Discretionary spending, which excludes Social Security, Medicare and Medicaid, would be cut by $21 billion in 2012 and $42 billion in 2013, according to an analysis by the Congressional Budget Office. That’s a small fraction of the nation’s $14 trillion economy.

The Democratic Unemployment Act

Slate

By David Weigel  
Aug. 1, 2011

How will President Obama and his party justify the spending
cuts in the debt deal?

On Sunday, after he’d been schooled by leaders on the automatic cuts that could
make a debt deal possible, Senate Budget Committee Chairman Kent Conrad, D-N.D.,
talked to reporters. He was tight-lipped on the details but broadly optimistic
about the bargain. There was one nagging question I wanted to ask: All the
discretionary spending cuts in the plan—did they threaten to slow down growth,
to drive up unemployment?

=====================================================================================

By Zachary Roth Senior National Affairs Reporter File/AP
8/1/11

In his announcement last night of the deal between Congress and the White House to raise the debt ceiling, President Obama declared that Washington leaders now “should be devoting all of our time” to addressing the country’s broader economic woes. But the agreement could itself have a major impact on the struggling economy, if it passes Congress.

So what’s the deal likely to mean for ordinary Americans?

Of course, the most important short-term impact of the plan, which would cut at least $2.4 trillion in spending over the next decade, is that the U.S. will avoid defaulting on its debt. That’s unquestionably a positive. Economists had warned that a default would be disastrous for everyone, throwing world financial markets into chaos and ushering in higher interest rates for years, or even decades.
Beyond avoiding a default, the deal could potentially help kickstart the broader economy, which managed just 0.8 percent growth in the first half of the year, with unemployment at 9.2 percent, and talk of a double-dip recession growing louder.

In a memo for investors published Sunday, Mark Zandi, the respected chief economist for Moody’s Analytics, called the agreement “a big plus for … the struggling economy.” Uncertainty over the debt ceiling standoff, Zandi argued, has contributed to slow economic growth. “Business executives are extraordinarily nervous, and won’t step up hiring until this drama is resolved,” he wrote. “Employers are not going to take that leap of faith and expand, given how little faith they have that policymakers will come through in time.” With the issue resolved–assuming, of course, that the deal passes Congress–that mindset could change.

Other economists say the deal will help reduce uncertainty not just over the debt ceiling, but over the larger issue of the deficit. By showing that Washington means business in addressing both problems, they argue, the agreement will lift business confidence and provide an economic boost.

But the deal doesn’t just raise the debt ceiling. It also calls for $2.4 trillion in spending cuts over the next decade. And that’s where the impact could be less positive. Most economists say cutting government spending when the economy is weak is likely to reduce jobs and growth by further weakening demand.

“Unemployment will be higher than it would otherwise have been,” Mohamed El-Erian, the CEO of Pimco, the world’s largest bond investment firm, said yesterday on ABC News. “Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.”

By how much? It’s hard to say with precision, because it’ll depend on which programs get cut, and that hasn’t been decided yet. But to get a rough sense, consider this: Zandi, who has worked with both Democrats and Republicans, calculated in February that the original budget passed by the House earlier this year, which cut $100 billion in spending for 2012, would cost around 700,000 jobs by the end of 2012. The deal announced last night calls for a yearly average of $240 billion in cuts over the next decade. Very roughly, that suggests the new plan would cost around 1.6 million jobs per year during that time.

Because the cuts are designed to be smaller over the next few years while the economy remains weak, then larger over the later part of the decade, that number is likely inflated. But there’s little doubt the deal will mean a significant drag on employment, at a time when over 14 million Americans are already out of work.

And the consensus is that job losses are likely to outweigh the positive impact of increased business confidence. “When you look at the history of these things, the finding is that we shouldn’t be kidding ourselves,” Paolo Mauro of the International Monetary Fund and an expert on the impact of spending cuts, told the New York Times. “When you do fiscal adjustment in the near term, it does have an adverse impact on economic growth.”

One final point that’s gotten lost amid the relief over the deal: the U.S. credit rating could be downgraded anyway. Both of the major ratings agencies warned last month that they were mulling a downgrade, thanks to concerns over Washington’s ability to tackle the long-term deficit problem.

Zandi judges in his memo that the debt ceiling deal will likely be enough to convince the agencies to keep the triple A rating. But investors today don’t appear to be reassured: Reuters reports that there’s still a “widespread assumption” that a downgrade is coming from at least one agency.  If that happens, it would be harder not just for the government but for ordinary Americans to borrow money, and the stock market would likely take a major impact.

So what’s the upshot? It’s pretty clear that on the most basic level, the debt ceiling deal is a plus for the economy, because it keeps the country out of a disastrous default. But at least in the short term, the spending cuts that come with it could turn the task of fixing the economy and getting Americans back to work into an even steeper climb.

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Categories: America, Democrats, government, Health, Jobs, money, people, politics, taxes, unemployed | Tags: , , , | Leave a comment

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