Budget cuts are bad for the economy

In case you missed this last week.

Texas’ cuts-only approach to its budget shortfall won’t solve the state’s long-term fiscal problems, according to Standard & Poor’s, a major bond rating agency.

“We believe that a balanced approach that includes both revenue enhancements and expenditure cuts has a higher potential of success in preserving the state’s long-term structural budget balance than a strategy that relies solely on expenditure cutbacks,” wrote S&P credit analyst Horacio Aldrete-Sanchez in a report released last week.

Though S&P is not likely to join the Texas Forward coalition, the analyst’s language mirrors that of the education groups, health and human service advocates and faith leaders that have decried the deep budget cuts.

Aldrete-Sanchez also emphasized that the state’s budget hole is not a one-time problem that will go away as the economy improves.

“In our view, the state’s budget imbalance is likely to reappear or persist beyond the upcoming biennium unless other sources of revenue or additional budgetary flexibility are identified to fill this growing funding gap,” the analysis continues.

I would have thought that this would be bigger news, but that Postcards entry is just about the only place I found it noted. I have no idea why that is. Be that as it may, a similar theme is being repeated elsewhere.

Spending cuts approved by House Republicans would act as a drag on the U.S. economy, according to a Wall Street analysis that put new pressure on the political debate in Washington.

The report by the investment firm Goldman Sachs said the cuts would reduce the growth in gross domestic product by up to 2 percentage points this year, essentially cutting in half the nation’s projected economic growth for 2011.

The analysis, prepared for the firm’s clients, represents the first independent economic assessment of the congressional budget fight, which could lead to a government shutdown as early as [this] week.


The Goldman Sachs analysis says the cuts would reduce the country’s economic growth by 1.5 to 2 percentage points for the year.

A smaller budget reduction of $25 billion, if approved as a compromise, would have a lower effect, reducing growth by 1 percentage point. The effects would fade over time, the report says.

“Fiscal drag is quickly emerging as a focus,” the Goldman Sachs report says. It says the spending cuts are “the most important near-term risk.”

Via Kevin Drum. And it’s not just Goldman Sachs, either.

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

As Daily Kos points out, Zandi was John McCain’s economic advisor in 2008, and he does call for future budget cuts to bring down the deficit. Just not what’s being proposed now by the Republicans. Really, this shouldn’t be a surprise to anyone. Take money out of the economy, lay people off, and what else would you expect? What’s more, we’re already seeing the effects of “fiscal drag”.

Deeper spending cuts by state and local governments weighed down U.S. economic growth in the final three months of last year.

The government’s new estimate for the October-December quarter illustrates how growing state budget crises could hold back the economic recovery.

The Commerce Department reported Friday that economic growth increased at an annual rate of 2.8 percent in the final quarter of last year. That was down from the initial estimate of 3.2 percent.

The weaker figure was disappointing and prompted some economists to lower their forecasts for economic growth in the current January-March quarter.

State and local governments, wrestling with budget shortfalls, cut spending at a 2.4 percent pace. That was much deeper than the 0.9 percent annualized cut first estimated and was the most since the start of 2010.

They’re seeing the same thing in England, too. Via Steve Benen, who notes that the prospect of austerity-induced job losses is of no concern to leading Republicans. As with the S&P report about Texas, you have to wonder why this isn’t bigger news. Here in Texas, we face the prospect of laying off 100,000 teachers, many of whom will face extremely tough prospects for getting hired elsewhere, plus thousands more education-related jobs being lost. Add on top of that all of the local job cuts. How could anyone think this won’t have a terrible effect on the economy? What exactly is the upside of this?

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