Remember that these spending cuts aren’t alone. Unless future legislation changes this, they’re alongside the expiration of the $160 billion payroll tax cut and the $60 billion in expanded unemployment insurance that the administration negotiated in the 2010 tax deal. So that means the economy — which is very weak right now — is losing something in the neighborhood of $250 billion in federal support.
Earlier today, Suzy Khimm quoted the International Monetary Fund saying “a fiscal consolidation equal to 1 percent of GDP typically reduces GDP by about 0.5 percent within two years and raises the unemployment rate by about 0.3 percentage point.” There’s reason to believe that in a weak global economy, the effect will actually be worse than that. But let’s say it isn’t. Projected GDP in 2012 is about $15.8 trillion. So a $250 billion cut is about 1.5 percent of 2012’s projected GDP. So whether we pass Reid or Boehner’s plan, we’re looking at a drag on growth of more than 0.5 percent of GDP and a drag on employment of more than 0.3 percent.
This is not good for the recovery.