Will the GOP's Budget Cuts Drive the Economy Into the Ditch?

For some reason, over the last few days, the claims about the effects of GOP budget cuts keep getting more theatrical.  First I saw Mark Zandi was saying that the cuts would cost 700,000 jobs over the next two years, and shave a half a percentage point off of GDP this year. Then I saw that Goldman Sachs thought that the cuts would knock up to two percentage points off this year's growth rate.  Chuck Schumer weighed in with the opinion that the cuts would not just lower growth, but were actually "a recipe for a double-dip recession."  And now I see that Scott Lilly of the Center for American Progress is telling Dana Milbank that the budget cuts "would lead to the loss of 650,000 government jobs, and the indirect loss of 325,000 more jobs as fewer government workers travel and buy things. That's nearly 1 million jobs - possibly enough to tip the economy back into recession." 

That's certainly troubling.  But like Ben Bernanke, I find these estimates somewhat high.  And many of the bloggers who are using them seem to be assuming that they are all one-year figures, when at least in the case of Zandi, we're not talking about an immediate loss of 700,000 jobs--we're saying that jobs will be 400,000 lower this year, and 300,000 lower next year.

It's important to remember what $60 billion dollars represents.  It is barely 0.4% of GDP.  It is 1% of all government spending in the US, and 1.6% of total federal spending.  It is 4% of the budget deficit projected for 2011 by the CBO.  

Now let's look at employment.  Total non-farm US payrolls are roughly 130 million.  Government payrolls are around 22 million:  14 million local employees (more than half of them teachers); about 5 million state employees, and 2.8 million federal employees, 650,000 of them in the post office, and about 800,000 in defense.

If you think that the cuts will cause a direct loss of 650,000 government jobs, as many bloggers seem to, you're saying that cutting Federal spending by 1.6% is somehow going to cause the federal government to shed more than 20% of its workforce.  Alternatively, if we're talking about all government jobs, we're saying that a 1% drop in all government spending will cause government at all levels to lay off 3% of their workforce--even though government employment is, as we've seen, pretty hard to cut.  Using these "standard multipliers", if we cut government spending by 1/3, then government at all levels would employ no one at all.

Some of the GDP estimates being bandied about don't seem much more plausible.  We're going to cut government spending by 0.4% of GDP, and see a 2% drop?  That's a hell of a multiplier.  A double-dip recession is an even more heroic stretch, given that the CBO is projecting GDP growth of 2.7% this year.

It's not that I am enthusiastic about the GOP's spending cuts; while I'm certainly glad that they're showing some real willingness to hit hard spending targets, the economy is still pretty fragile.  But as Bernanke says, this just isn't going to make much difference.  In the face of the current budget, these changes are basically trivial and symbolic.  And getting hysterical isn't helping anything.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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