GOP spending plan would cost 700,000 jobs, new report says

A Republican plan to sharply cut federal spending this year would destroy 700,000 jobs through 2012, according to an independent economic analysis set for release Monday.

The report, by Moody’s Analytics chief economist Mark Zandi, offers fresh ammunition to Democrats seeking block the Republican plan, which would terminate dozens of programs and slash federal appropriations by $61 billion over the next seven months.

Zandi, an architect of the 2009 stimulus package who has advised both political parties, predicts that the GOP package would reduce economic growth by 0.5 percentage points this year, and by 0.2 percentage points in 2012, resulting in 700,000 fewer jobs by the end of next year.

His report comes on the heels of a similar analysis last week by the investment bank Goldman Sachs, which predicted that the Republican spending cuts would cause even greater damage to the economy, slowing growth by as much as 2 percentage points in the second and third quarters of this year.

Republicans have dismissed both reports, calling them the product of the same flawed economic thinking that produced President Obama’s $814 billion stimulus package -- a bill that Democrats argued would keep unemployment below 8 percent. In fact, the unemployment rate has hovered at or above 9 percent for nearly two years.

On Monday, Republican aides were particularly critical of Zandi, a registered Democrat who advised Republican John McCain’s 2008 presidential campaign but became one of the most influential advocates for government economic stimulus a year later.

“The fact that a relentless cheerleader for the failed ‘stimulus’ - which the Democrats who run Washington claimed would keep unemployment below eight percent - refuses to understand that ending the spending binge will help the private sector create jobs is sad, but not surprising,” said Michael Steel, a spokesman for House Speaker John A. Boehner (R-Ohio).

Republican leaders frequently claim that cutting government spending will create jobs by removing the fear of higher taxes from the minds of the nation’s business owners and entrepreneurs.

“There is more money sitting on the sidelines than there has been in the last 50 years,” Rep. Kevin McCarthy (R-Calif.), the number three Republican in the House, told reporters last week. Freeing business to invest that cash would produce “stronger stimulus” than anything government could do, McCarthy said. “That is a philosophy we know that would work.”

So far, the Republicans have been unable to marshal an independent analysis that reflects that view. But on Monday they did offer the opinion of Stanford University economist John B. Taylor, who argued that the macroeconomic models employed by Zandi, Goldman Sachs and many other independent forecasters -- including the Congressional Budget Office -- overstate the economic impact of government spending and ignore the boost to confidence that would come from reining it in.

Taylor also noted that CBO’s analysis of the GOP budget bill shows that it would only cut spending by $19 billion over the next seven months, with the remainder of the $61 billion in cuts taking effect in future fiscal years.

“Thus the cut in budget authority does not reduce spending “abruptly,” as the [Goldman Sachs] report assumes,” Taylor writes in his blog, Economics One. “Rather it is a quite gradual effect. Even if one used the flawed Keynesian multipliers implied by the report, the impact would be less than one-third what the report claims.”

Zandi also had bad news for liberal Democrats who are resisting sharp spending cuts: Bringing deficits down to sustainable levels will require more than a growing economy. Even if the economy recovers as expected, he writes, lawmakers will have to cut about $400 billion a year through the rest of this decade to narrow the gap between spending and revenue, and stop adding significantly to the national debt.

“Significant government spending restraint is vital, but given the still halting economic recovery, it would be counterproductive for that restraint to begin until the economy is creating enough jobs to bring down the still very high unemployment rate,” Zandi writes. “Shutting the government down for any length of time would also be taking a big chance with the recovery, not only because of the disruption to government services, but also due to the potential hit to the fragile collective psyche.”

Lawmakers are facing a Friday deadline to approve a new measure to fund the government through the remainder of this fiscal year; the current funding bill is set to expire. Republicans insist the new measure should include deep cuts; Democrats say they are willing to cut spending this year, but not nearly as much.

A potential compromise emerged late last week, when House Republicans offered a stopgap measure that would keep the government operating through March 18 while cutting $4 billion from programs that President Obama has already identified as unnecessary. But even if that compromise passes the House and Senate this week, lawmakers are still sharply divided on funding for the rest of the fiscal year and beyond.

A partisan brawl is also brewing over the legal limit on government borrowing, currently set at $14.3 trillion. In his new report, Zandi predicts that the U.S. Treasury will be able to manage the government’s finances under that cap only until June. With Republicans lining up against an increase, Zandi writes that the “threat of a serious policy misstep in the next several weeks and months” is serious.

But the potential fallout from such a misstep is also serious, Zandi writes, raising “the odds that policymakers will be able to come to terms.” He concludes that the most likely scenario is “a political compromise” that raises the debt limit and “roughly splits the difference between the administration and House Republican proposals with spending cuts in fiscal year 2011 of closer to $30 billion.”

“This isn’t ideal fiscal policy, but the economic recovery will be able to manage through it,” Zandi writes. “And if the compromise is reached relatively gracefully, it could send an encouraging signal that policymakers will be able to reasonably navigate the much more serious budget battles set to come.”

montgomeryl@washpost.com

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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