Budget Cuts: How Spending Cuts Hurt the Economy

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February 27, 2011; Source: CNNMoney | Economists Mark Zandi and Douglas Holtz-Eakin have differing predictions on the impact of federal budget cuts on the still shaky U.S. economy. The House of Representatives proposed a $61 billion cut in the continuing resolution that, in the absence of an approved federal budget, allows the government to continue operating in Fiscal Year 2011. Zandi of Moody's Analytics says that enacting a $61 billion cut would reduce economic growth from a projected 3.5 percent to 3.0 percent. That seems like nothing, right?

Except that Zandi says that would cost the economy between 400,000 and 500,000 jobs. "I think it's premature to engage in that kind of budget cutting," Zandi said. "We can't do that, I don't think, until the economy is off and running."

Holtz-Eakin, who advised John McCain in his 2008 presidential campaign, says the impact of the cuts, which he basically supports, would be much lower, between 2 and 3 tenths of a percentage point, what he calls a "rounding error" in a $15 trillion economy. But it's hardly a static picture. Recent estimates of economic growth have been reduced below 3 percent due to the impact of continuing state and local budget cuts, and Goldman Sachs economists think that the combined impacts of the budget cuts could be much worse than Zandi's estimates, maybe three or four times worse.

Well known non-economist Fox News anchor Chris Wallace pronounced the Goldman Sachs estimates as "discredited", but the source for his unqualified conclusion was not immediately in evidence.

Zandi is no left wing radical by any stretch of the imagination, both by his long history of writing and his current employment. His sober analysis of the impact of FY2011 budget cuts should be a wake-up call for nonprofits facing a turbulent economy whose macro-"recovery" has had little positive impact for the struggling families many nonprofits serve. But then, FY2011 budget cuts will be followed by proposed FY2012 cuts, and Zandi's half-point slowdown estimate might be a distant memory.–Rick Cohen


    The budget cuts mid year are ridiculous.
    Take money away and you cut jobs.
    Cut jobs = more people out of work who need assistance. Budget cuts = less assistance. What do those things equal?
    Less spending, more foreclosures, more lives thrown away, less growth in the country.

    It sounds like a great plan to decrease the middle class, increase the have-nots, and increase the wealth of the Haves.