Washington — The deal reached by Congress to raise the debt ceiling and cut more than $2 trillion in public spending should have only a minor impact on the economy for the next two years.
Almost all the cuts would be made in 2014 or beyond. The approach heeds a warning by Federal Reserve Chairman Ben Bernanke and many private economists: Cutting too much too soon could harm the weak economic recovery.
Yet the deal won’t do much to help the economy, either, at least in the short term, economists said.
Under the debt deal, discretionary spending, which excludes Social Security, Medicare and Medicaid, would be cut $21 billion in 2012 and $42 billion in 2013, according to an analysis by the Congressional Budget Office.
Combined, those cuts come to less than 1 percent of the nation’s $14 trillion economy. The impact “should be relatively minor,” says Brian Gardner, senior vice president at Keefe, Bruyette and Wood, an investment bank.
The spending cuts would increase to $75 billion in 2015 and $156 billion in 2021, the CBO estimates.
Overall, the first phase of cuts would reduce spending by $917 billion over 10 years. A congressional committee would decide on a second phase of cuts totaling $1.5 trillion.
Reduced government spending could mean less money for highway construction, housing assistance, government-sponsored scientific research or any number of other federal programs.
Companies that work on Defense Department contracts could suffer, too. The stocks of Lockheed Martin Corp., General Dynamics Corp. and Raytheon Co. all sank about 1 percent Monday.
If lawmakers fail to reach a deal on a second round of cuts, the Pentagon’s budget would be cut automatically by about $500 billion. That measure is designed as a threat, to make sure congressional negotiators have strong incentives to compromise.
Delaying the deepest cuts buys time for the economy to recover. Right now, it can’t absorb shocks very well: Unemployment is still 9.2 percent, people are spending less, worker pay has stagnated, and economic growth is the slowest since the end of the recession in June 2009.
Worries about the economy, including the weakest manufacturing in two years, were one reason the stock market couldn’t sustain a rally after the debt deal was struck. The market was flat Monday.
The Federal Reserve meets next week. Economists will watch for any signals that the Fed is considering new steps to help the economy, such as re-investing its government bond holdings indefinitely to keep interest rates down.
The debt deal could restore some confidence among individuals and businesses by removing the fear that the U.S. government would default on its debt for the first time, says Troy Davig, an economist at Barclays Capital.
Overall, the deal could subtract about 0.2 percentage point from economic growth in 2012, Davig estimates. While that is a relatively light blow, the economy only grew at an annual rate of 1.3 percent in April, May and June.
Comments
Ron Holzwarth 2 years, 8 months ago
"the end of the recession in June 2009."
I'm not an expert, so I don't know anything. But someone told me that if you use the price of gold as a measure instead of using the very useful accounting trick of considering the dollar to be a constant value, the recession did not "end" in "June 2009". Instead, it is still continuing, and by some definitions, it is now a depression. .
The gist of that person's argument is that inflation is actually running at about 9% to 10% per year, because he considers the constantly rising price of gold, food, and fuel to be a very good measure of it.
But, the price of gold, food, and fuel are not considered at all in calculating the Consumer's Price Index (CPI), which is what the government's official claim of what the inflation of the dollar is. It is referred to as "core inflation". The Cost Of Living Adjustment (COLA) is determined by the "core inflation" every year for Social Security recipients.
But the constantly rising price of food and medications is the largest concern of most Social Security recipients. And they are not counted at all.
It was only what, three or four years since I heard radio advertisements urging listeners to buy gold right now at about $800 an ounce, because some experts believed that it would hit $1,000 an ounce in the relatively near future.
The price of gold is now over $1,600 an ounce.
Kontum1972 2 years, 8 months ago
2014..LoL...we will all be in alien death camps....LoL!
Fossick 2 years, 8 months ago
"Almost all the cuts would be made in 2014 or beyond" is a nice way of saying that none of the cuts will be made. Therefore all the conniption-throwing progs screaming about how this bill guts x or y can rest easy. $2.7 trillion in imaginary cuts is no different than the 'clean raise' that Obama wanted.
ConnieLingus 2 years, 8 months ago
""That leaves time to do something truly substantial for the people:""
What's that merrill? Give their money back? Which 50% of the people are you substantially for? The half that pays taxes or the half that does not.
Liberty_One 2 years, 8 months ago
If Ben Bernanke says that we shouldn't cut the budget, then you know that means we should do exactly the opposite. Bernanke is a perfect example of why government is terrible at running the economy. Anyone in the private sector who had performed so poorly would have been fired, but Bernanke gets another term?
Also, there isn't a recovery, this is just the Fed trying to re-inflate the bubble.
Flap Doodle 2 years, 8 months ago
Forget THE people's BUDGET!!! Read the PEOPLE's cube!!!!! It = waaaay more truthful!!!! NOT reading THE people's CUBE = dumb and irresponsible and planet killing ! http://thepeoplescube.com/
Richard Heckler 2 years, 8 months ago
The largest obstacles are fear of losing special interest campaign money, guts to terminate Bush tax cuts and backbone to cut off pork barrel corporate subsidies.
The remedy list:
One answer to problems such as this: CUT OFF special interest financing of elections! YES even at the local level.
Our government is always claiming the USA is about democracy. In that case allow the citizens to practice democracy by allowing citizens to vote in these measures come 2012:
Let's demand a new system and vote in Fair Vote America : http://www.fairvote.org/irv/ Demand a change on the next ballot.
Let's have public financing of campaigns. Citizens cannot afford special interest money campaigns for it is the citizens that get left out. Let citizens vote on this issue. http://www.publicampaign.org/
Bribery of elected officials is the most stinky of all bribery!
Richard Heckler 2 years, 8 months ago
That leaves time to do something truly substantial for the people:
The largest obstacles are fear of losing special interest campaign money, guts to terminate Bush tax cuts and backbone to cut off pork barrel corporate subsidies.
If all sides of the aisle were interested in a budget of substance that accomplishes all that matters there is only one budget on the table.
People's Budget = $4 trillion reduction
What the Peoples Budget does very specifically:
http://cpc.grijalva.house.gov/index.cfm?sectionid=70§iontree=5,70
http://www.npr.org/2011/04/15/135435883/the-nation-obama-should-fight-for-peoples-budget
http://www.democracynow.org/2011/4/14/while_obama_touts_compromise_with_gop
http://www.thenation.com/blog/159939/fighting-peoples-budget
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