The last time the U.S. came critically close to defaulting on its debt, a Democratic president and Republican House Speaker signed a deal that would increase the country’s borrowing limit and curb some of the growth in federal spending over the next few years. The deal averted a default, but already prevented a gradual recovery from the Great Recession.
The debt deal agreed in principle by President Biden and Speaker of the House Kevin McCarthy is less restrictive than the one agreed by President Barack Obama and Speaker of the House John Boehner in 2011, centering on spending cuts and caps for just two years. is placed on The economy is in a much better position to absorb these cuts. As a result, economists say the deal is unlikely to do the lasting damage to the economic recovery that was caused by the 2011 debt ceiling deal, and paradoxically, the newfound spending restraint will do it. He says it might even help.
Ben Harris, a former deputy Treasury secretary in charge of economic policy who stepped down earlier this year, said: “For months I have been worried about the big economic impact of the negotiations, but the macro impact is at best negligible. It’s like,” he said.
“The most important impact is the stability that accompanies the deal,” Harris said. “Markets can function if they know a catastrophic debt ceiling crisis is not imminent.”
Biden said earlier this month that he was confident any deal would not cause an economic slowdown. This is partly because, despite pandemic support spending expiring and total federal spending declining from rising levels of COVID-19, sustained growth over the past two years has reduced last year’s annual budget deficit to 1.0%. This is because it contributed to saving $700 billion.
At a press conference at the G7 summit in Japan earlier this month, when asked if spending cuts under the budget deal would cause a recession, Mr Biden said: I know they don’t. In fact, the fact that he could cut government spending by $1.7 trillion did not cause a recession. That led to growth. “
A deal in principle still has to pass the House and Senate, but faces opposition from the most liberal and conservative lawmakers. This goes far beyond spending limits and includes new labor requirements for food stamps and other government aid, as well as efforts to expedite permitting for some energy projects.
But the highlight is spending limits. Negotiators agreed to make some cuts in discretionary spending this year and next, excluding defense spending and veterans care, after factoring in some accounting adjustments. Spending on military and veterans is expected to rise this year to what Mr. Biden requested in the 2024 budget. All these programs are expected to grow him 1% in his 2025 fiscal year, which is below expectations.
A New York Times analysis of the proposal suggests that federal spending will be cut by about $55 billion next year, compared to Congressional Budget Office projections, and another $81 billion by 2025. .
The first behind-the-scenes analysis of the economic impact of the deal was provided by Moody’s Analytics economist Mark Zandy. He previously predicted that a prolonged default could cost the U.S. economy 7 million jobs, and that the drastic spending cuts proposed by Republicans would cost 2.6 million jobs.
His analysis of the new deal was much more muted. He estimates that the economy will have 120,000 fewer jobs by the end of 2024 than it would have had without the deal, and the unemployment rate would be about 0.1 percentage points higher.
Mr. Zandy wrote on Twitter on Friday “With the economy fragile and the risk of recession high, it is not the best time to curb fiscal policy,” he said. But he said, “It’s manageable.”
Other economists say the economy could indeed take mild fiscal austerity measures right now. The biggest economic problem is persistent inflation, partly driven by robust consumer spending. Removing some federal spending from the economy could help the Federal Reserve (Fed), which is trying to curb inflation by raising interest rates.
“From a macroeconomic perspective, the deal is a small help,” said Jason Furman, a Harvard University economist who served as President Obama’s deputy director of the National Economic Council in 2011. The speed at which the cooling effect is achieved. “
“I think the Fed will welcome the help,” he said.
Economists generally believe that increased government spending will boost the economy in the short term, unless offset by higher tax revenues. That’s because governments borrow to pay salaries, buy equipment, pay for healthcare, and provide other services that ultimately support consumer spending and economic growth. This can especially help boost the economy during times of low consumer demand, such as in the immediate aftermath of a recession.
That was the case in 2011 when Republicans took control of the House and forced a showdown with Mr. Obama over raising the borrowing limit. The country was slowly crawling out of the hole left by the 2008 financial crisis. The unemployment rate was 9 percent. The Fed cut interest rates to near zero to boost growth, but many liberal economists urged the federal government to spend more to stimulate demand and boost job growth.
The budget deal between Republicans and Obama, hammered out by then-Vice President Biden, had the opposite effect. In the first year after the agreement, federal discretionary spending was reduced by 4% compared to baseline projections. In the second year, it cut spending by 5.5% compared to expectations.
Many economists have since blamed those cuts and too little stimulus early in the recession for prolonging the pain.
The deal announced on Saturday includes smaller cuts. But an even bigger difference today is the economic situation. The unemployment rate is 3.4 percent. Prices are rising more than 4% a year, well above the Fed’s 2% target rate. Fed officials are trying to cool the economy by making borrowing more expensive.
JPMorgan Chase & Co. analyst Michael Feroli said this week that the right way to assess a new deal is “how much the Fed will do to keep aggregate demand in check, as fiscal austerity is doing its job.” Do I need to reduce my work?” Ferroli estimated that in terms of curbing inflation, the deal could serve the equivalent of raising interest rates by a quarter of a percentage point.
While the deal will have only a small impact on the future level of the country’s budget deficit, Republicans say it will help the economy by reducing debt accumulation. “We’re trying to bend the government’s cost curve for the American people,” said Rep. Patrick T. McHenry of North Carolina, one of the Republican negotiators, this week.
Nevertheless, the spending cuts from this agreement will affect non-defense discretionary programs such as Head Start Preschool and the people they serve. New labor requirements could hinder access to food and other assistance for vulnerable Americans.
Many progressive Democrats warned this week that the impact would amount to their own economic damage.
“After inflation eats up that share, the flattening of funds means fewer households have access to rent subsidies, leaving Head Start children out,” said Lindsey Owens, executive director of the Washington liberal group Groundwork Collaborative. “There will be fewer and fewer services for the elderly.”
Katie Edmonson Contributed to the report.
