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Economists: Unemployment Would Be A Full Point Lower Without Deficit Reduction Efforts

By Travis Waldron on May 9, 2013 at 9:30 am

"Economists: Unemployment Would Be A Full Point Lower Without Deficit Reduction Efforts"

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America’s budget deficit is shrinking at a faster pace than at any time since World War II, and it is now projected to fall below 5 percent of GDP this year, 3 percent of GDP in 2014, and 2 percent of GDP in 2015, according to a Potomac Research report released Wednesday. That may please Washington politicians who have ignored jobs and unemployment over the last three years, but it isn’t good for the economic recovery.

The immediate deficit reduction efforts Washington has pursued repeatedly since Republicans took control of the House of Representatives in 2011 have in fact dampened the economic recovery, economists told the New York Times, and without the spending cuts and tax increases enacted in the last three years, unemployment would be a full-point lower and economic growth two points higher:

The nation’s unemployment rate would probably be nearly a point lower, roughly 6.5 percent, and economic growth almost two points higher this year if Washington had not cut spending and raised taxes as it has since 2011, according to private-sector and government economists.

After two years in which President Obama and Republicans in Congress have fought to a draw over their clashing approaches to job creation and budget deficits, the consensus about the result is clear: Immediate deficit reduction is a drag on full economic recovery.

Hardly a day goes by when either government analysts or the macroeconomists and financial forecasters who advise investors and businesses do not report on the latest signs of economic growth — in housing, consumer spending, business investment. And then they add that things would be better but for the fiscal policy out of Washington. Tax increases and especially spending cuts, these critics say, take money from an economy that still needs some stimulus now, and is getting it only through the expansionary monetary policy of the Federal Reserve.

The spending cuts have been especially damaging, as they have made up the vast majority of deficit reduction efforts since the end of the Great Recession. Modest tax increases targeting the wealthy went into effect at the beginning of 2013, but it is the expiration of the payroll tax holiday, which will raise taxes on the median American family by roughly $1,000 this year, that will hurt the recovery, the economists and analysts said. Nonpartisan reports have said the income tax increases on the wealthy would do little to affect growth.

That deficit reduction is holding back the recovery should not come as any shock. The stimulus bill President Obama signed into law in 2009 put the U.S. on a path to recovery that far outpaced the austerity-laden European economies, but as focus has turned to deficit reduction, growth has turned tepid. While rises in government spending have traditionally added to growth and pulled the U.S. out of economic downturns, it has plateaued since 2010, hampering recovery efforts this time. Reduced spending, in fact, “has detracted from growth in five of past seven quarters,” one investment bank wrote in a midyear report this week.

Republicans have blocked efforts, such as Obama’s American Jobs Act, that would have further stimulated the economy. That legislation would have led to the creation of a million jobs and added to growth, according to independent analysts, and would have aided states and local governments and federal agencies that have laid off more than 500,000 public employees, many of them teachers and public safety workers, since the end of the recession. With government borrowing costs at historic lows and unemployment still high, it’s that sort of shot in the arm the economy needs. But after Congress let sequestration, the damaging budget cuts that could wipe another 700,000 jobs out of the economy, take effect in March, it is now focused on finding even more deficit reduction in the immediate future.

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