Moodys: GOP Spending Cut Plan Could Cost 700,000 Jobs

Moodys warns the the Republican plan to cut spending could cost the economy 700,000 jobs.

Moodys Analytics is warning that the GOP’s proposed spending cut plan could hinder the economic recovery.

While the government spending cuts proposed by House Republicans for this fiscal year mean only modest fiscal restraint, this restraint is meaningful. If fully adopted, the cuts would shave almost 0.5% from real GDP growth in 2011 and another 0.2% in 2012. There would be almost 400,000 fewer U.S. jobs by the end of 2011 than without the cuts and some 700,000 fewer jobs by the end of 2012. The fallout will extend into next year because it takes time for budget cuts to filter through the economy. In all likelihood, the proposed House cuts would not undermine the current recovery; still, it is not necessary to take the chance.

This wouldn’t be true if the current budget deficits were crowding out private investment, but they aren’t. Business demand for credit has recovered modestly, and households continue to lower their debt obligations. Interest rates also remain extraordinarily low. Some of this is due to the Fed’s credit easing, but global investors also remain willing buyers of U.S. debt even at low interest rates. Ten-year Treasury bonds are yielding 3.5%, fixed mortgage rates are near 5%, and borrowing costs for below-investment grade, or “junk”, corporate bonds are 8%—about as low as they have ever been. Global investors won’t remain avid buyers of U.S. debt for long if policymakers don’t tackle the nation’s long-term fiscal problems; yet markets today appear unconcerned about the near-term deficits.

I completely agree that the long-term budget outlook is in desparate need of repair. A combination of tax increases, reduced spending on defense, and meaningful reforms to reduce health care costs are absolutely, 100% necessary — in the long term. And we should absolutely start laying the foundation for that now.

But when unemployment is still at 9%, over 400,000 jobs have been cut from government in the past two years, and private-sector job growth is still anemic, I question whether short-term spending cuts are prudent. Especially when we aren’t currently seeing any economic effects of deficit spending.

FILED UNDER: Deficit and Debt, Economics and Business, US Politics
Alex Knapp
About Alex Knapp
Alex Knapp is Associate Editor at Forbes for science and games. He was a longtime blogger elsewhere before joining the OTB team in June 2005 and contributed some 700 posts through January 2013. Follow him on Twitter @TheAlexKnapp.

Comments

  1. legion says:

    It’s really very simple:
    The GOP would rather see America fail than allow a Democratic President succeed.

    The crisis _is_ the plan. It always was.

  2. There is no that putting our fiscal house in order isn’t going to cause pain but it’s better to have some pain now than a lot of pain later.

    And, quite honestly, the idea of losing government jobs that add nothing to economic productivity and don’t contribute to innovation doesn’t really phase me all that much. Both we, and the government employees, would be better off if they were working in the private sector

  3. Murray says:

    @doug
    The losses in jobs they estimate aren’t “government jobs”

  4. Alex Knapp says:

    Doug,

    Both we, and the government employees, would be better off if they were working in the private sector

    There are currently 4 job seekers for every 1 job in the private sector right now. Please explain to me how the economy will improve if we add to the number of job seekers.

    I agree that, overall, the government should be reduced. I question whether it’s prudent to do so in the current economic and employment climate.

  5. Explain to me how we’re going to solve our fiscal problems without some pain somewhere?

    You seem to think that we can just trim around the edges, but it’s fairly obvious that those days are long gone.

  6. jwest says:

    If jobs were actually lost, President Obama has proven he can create new jobs for only $282,000 each.

    Such a deal.

  7. mantis says:

    And, quite honestly, the idea of losing government jobs that add nothing to economic productivity and don’t contribute to innovation doesn’t really phase me all that much.

    Good to know Doug is on record as signing on to the Republican agenda: make sure more Americans suffer, go broke, and die earlier.

    Both we, and the government employees, would be better off if they were working in the private sector

    Oh, so there are private sector jobs just waiting for all those folks you want to see out of work? Please elaborate.

  8. Wiley Stoner says:

    I think I am having vapors. I agree with Doug Mataconis. Alex, government cannot fix the problem, government is the problem. It is not the aim of this administration to make the economy better. Socialists do not believe in the free market system. I suggest you have someone visit Wizbang to see what they have to say about Obama’s agenda. Then defeat that arguement. But you will not because it is easier to defame the messenger than defeat the message.

  9. When did government jobs become so sacrosanct? I’m sure you have a good source for 400,000 government jobs being cut, but I seem to remember reading that while Obama has been president the federal payroll has increased by 200,000 people. Here’s a good table from the federal government’s OPM, which is even more striking when you consider the decline in uniformed personnel.

    Out here in the “real world” when we can’t afford an employee, they get laid off. Why are government jobs different? Because they are so efficient? So necessary? Or so connected?

  10. reid says:

    There is no that putting our fiscal house in order isn’t going to cause pain but it’s better to have some pain now than a lot of pain later.

    You’re talking in generalities here. How do you quantify “some” and “a lot”? It looks to me like that “some” will almost certainly be major, so you better be able to guarantee that if we don’t do it (vs. some other approach), we’ll be in a monumental mess later. I know I’m asking a lot of a blogger, but someone somewhere that’s for big cuts should have done the legwork.

  11. (And note the George Bush the Elder had more federal employees out of uniform than anybody since 1962.)

  12. mantis says:

    I suggest you have someone visit Wizbang to see what they have to say about Obama’s agenda.

    Oh, the Lara Logan rape porn fiction fantasy website? No thanks.

  13. ponce says:

    “Explain to me how we’re going to solve our fiscal problems without some pain somewhere?”

    Grow the economy?

  14. Have A Nice G.A. says:

    If jobs were actually lost, President Obama has proven he can create new jobs for only $282,000 each.

    Such a deal. indeed…..

  15. Alex Knapp says:

    @Doug,

    Explain to me how we’re going to solve our fiscal problems without some pain somewhere?

    700,000 jobs lost in the private sector is pretty damn substantial.

    Obviously, there will be some pain involved. But there ought to be some prudential effort made to minimize that pain. The Republican plan doesn’t solve any long term problems and makes the economy worse. Why is that something ideal?

    When did government jobs become so sacrosanct? I’m sure you have a good source for 400,000 government jobs being cut

    That’s the total number of federal, state, and local government jobs lost since 2008.

    I’m not saying that government jobs are sacrosanct. I’m asking whether it’s a good idea to cut those jobs right now, when unemployement is still above 9%, instead of later, when there’s sufficient job growth in the private sector to absorb the loss.

  16. EJ says:

    they derive this from the same macro analytic model they used to analyze the stimulus spending. if you think stimulus spenidng has a lot of impact, then reducing deficits will have the opposite effect. If the stimulus didnt do much, then cutting isnt going to have much of a negative effect. Either way, the Moody’s analytic model is not a measurment – its just a regression analyis of past data that has a lot of assumptions built in and different peoples models say different things.

    Even if you assume some pretty potent kensyian effects at work year, you still have the longer term problem. The assumption of deficit spending in recessions is that you stop it once its over. But our fiscal situation is structually imbalanced. So any debt taken now compounds indefinetally into the future and without changes, that will result in a net drag on economic growth at the very least and contrbuting to a financial crisis at the most.

    The benifits of reducing deficits right now are more important than any minimal kensyian effect that exists. And any removal of a kensian effect can be mitigated in part or in whole by just keeping monetary policy looser for a longer period of time.

  17. Efbandy says:

    Mark Zandi of Moodys Analytics is a govt tool (see testimony in favor of stimulus) and gets #fail in prognostication (see Fin crisis).

  18. john personna says:

    So let’s try some $/job math.

    The Republican plan would cut $100 billion more than the administration’s plan and per this cost 700K jobs.

    $142,857 to kill each job?

    Interesting, that is in the same ballpark as the $282,000 nitwits above find so outlandish.

  19. reid says:

    Alex, you might have also mentioned the Goldman Sachs report:

    http://blogs.abcnews.com/thenote/2011/02/goldman-sachs-house-spending-cuts-will-hurt-economic-growth.html

    For those who think Zandi is just a marxist pawn….

  20. wr says:

    Doug — You sound just like David Brooks here. While it’s incredibly generous of you to offer the American people pain and sacrifice, I’m wondering exactly what pain you will be feeling if hundreds of thousands of Americans lose their jobs, and if we reduce their unemployment benefits and slash their Medicare and do everything we can to impoverish them.

    I mean, I see the pain from them. But are you suffering?

    Nah, I didn’t think so.

    And as soon as someone suggests a remedy which would cause you a teeny bit of sacrifice — a raise in taxes — you start screaming about “bloodsuckers.”

    So please spare me all the bromides about how “we” have to suffer to make the economy fit your ideal. Until you are actually willing to be one of “us.”

  21. Moosebreath says:

    Doug,

    “Explain to me how we’re going to solve our fiscal problems without some pain somewhere?”

    Funny how your definition of “somewhere” is always taking from the poor, and never the rich in the form of additional taxes.

  22. Dave Schuler says:

    Mr. Zandi is making bad, archaic assumptions about multipliers that haven’t borne out in actual experience. Other calculations find no such result.

  23. Alex Knapp says:

    @Dave,

    It appears that Goldman Sachs’ economist Alec Phillips reached a similar conclusion. See reid’s link above.

  24. Government mandates and spending often has a varying impact on taxpayers, as well as unintended consequences such as influencing unemployment and the housing market. Additional consumer credit analysis and commentary from Moody’s Analytics’ Mark Zandi is available at: Mark Zandi Commentary

  25. Dave Schuler says:

    @Alex:

    Yes. They’re making the same bad assumptions.

  26. Lgbpop says:

    If the government would stop taking so much money out of the private sector and leave it for salaries, benefits, capital equipment improvement and the like you’d see an insane amount of private-sector job growth. The big problem with filtering money through the government back into the economy is the amount of money skimmed off for salaries and benefits paid to government employees – NONE of who do anything productive economically.

    The government could tax 100% of ALL salaries and activity, and the amount collected still would not balance the budget – let alone begin to reduce the federal debt already created. Open your eyes, people, the problem is TOO MUCH SPENDING.

  27. reid says:

    The government could tax 100% of ALL salaries and activity, and the amount collected still would not balance the budget – let alone begin to reduce the federal debt already created.

    Would it really not even begin to reduce the federal debt? And what is your timeframe for balancing the budget? Pardon me if I’m skeptical.

  28. Herb says:

    Well, they did promise the last election was all about jobs….

    We shoulda known they were talking about getting rid of them.

    “Explain to me how we’re going to solve our fiscal problems without some pain somewhere?”

    No doubt solving fiscal problems will require, as you say, “pain.” But I don’t see why “700K jobs lost” pain is preferable to “rich man giving up 3 more points on his income tax” pain.

  29. anjin-san says:

    > If the government would stop taking so much money out of the private sector and leave it for salaries, benefits, capital equipment improvement and the like you’d see an insane amount of private-sector job growth

    Or, you might see speculators making billions of dollars while contributing nothing to the economy. Beware of simple answers, the world is a complicated place.

  30. mantis says:

    Keep in mind, whenever a Republican or libertarian tells you something is going to painful, the pain they speak of is always someone else’s.

  31. c.red says:

    Dave S – At what point do we accept that the Republican plan is a bad idea?

    The OMB, Goldman Sachs and Moodys have all said it is a job killer and will lead to reduced growth in what everyone agrees is a fragile recovery at best. I understand “austerity measures” have hurt Germany and caused Britain go back into declining GDP for at least one quarter and they are looking at a double dip recession.

    I agree we need to deal with the deficit and debt sometime… but the plan on the table makes it worse not better.

  32. michael reynolds says:

    Alex, you rational bastard.

  33. john personna says:

    Slightly smart response: I don’t trust these multipliers.

    Even smarter response: I don’t believe any multipliers.

    The difference between the two is that with the even smarter response you have to be numbers-agnostic. You can’t say one number is “wrong” by citing another, equally suspect, figure.

    So, stepping back, we can reduce this to “reducing spending reduces related jobs.” Big duh. Remaining questions would be whether in this economy there is sufficient demand to supplant those reduced jobs, or whether in a continuing demand slump they will be a net loss.

    Without using numbers, just looking at the state of the economy (and how other “austerity nations” are faring), I’d say its a short term net loss. Of course, if your agenda is to reduce the size of government, even at some short term cost, that’s fine with you.

  34. Stan says:

    Mark Zandi, who I think wrote the Moody analysis, was an adviser to John McCain. Goldman-Sachs is not known as an institution that supports socialism. So I regard the Moody and the Goldman-Sachs reports as impartial expert witnesses testifying in a trial of the GOP economic plan. I’m no lawyer, but my understanding is that if you’re a trial lawyer and the other side presents expert testimony against your client, you’re supposed to counter it by presenting expert testimony that supports your case, not by saying the opposition witnesses are knaves or fools. Where’s the expert testimony in support of the Republican budget cuts?

  35. mantis says:

    Where’s the expert testimony in support of the Republican budget cuts?

    I found it!

  36. And when did John McCain become someone the rightwingnuts here admire?

    How soon do we reach the point that I, as a private employer, am told that I can’t lay someone off because of the nagtive effect it would have on the economy? How is that different than being told these public employees can’t lose their jobs? Or better yet, when does anyone start to factor in how the deficit spending and the credit crunch it is causing are hurting small businesses. You know, the place all those real jobs are supposed to be generated in?

  37. Alex Knapp says:

    Charles,

    Or better yet, when does anyone start to factor in how the deficit spending and the credit crunch it is causing are hurting small businesses.

    Everything I’ve read suggests that there isn’t any crowding out effect from the deficit, as evidenced by low interest rates on T-bonds. Indeed, Moodys makes that point:

    This wouldn’t be true if the current budget deficits were crowding out private investment, but they aren’t. Business demand for credit has recovered modestly, and households continue to lower their debt obligations. Interest rates also remain extraordinarily low.

    Everything I’ve read suggests that the credit crunch for small business’s is coming from an unwillingness on the part of banks to lend to small businesses, not the budget deficit. Do you have any evidence that suggests otherwise?

  38. Now, why do you think they might be unwilling to lend to small businesses? There’s a rather huge gap between ivory tower theory and what I as a real small biznessman experience out here in the real world. It is more complicated than just the deficit, but even the non-deficit factors are kind of influenced prety strongly by those who control the deficit. And interest rates.

    Moody’s has a nice self-licking ice cream cone there, claiming interest rates remain low because the demand for credit is down. Very convenient to say it’s because I don’t actually want the money.

  39. Stan says:

    charles austin, you’re arguing on the basis of your feeling of justice and I’m arguing on the basis of economics. You feel it’s unjust for the government to constrain your freedom of action as an employer and I feel that it depends on the situation. We’re not going to agree on this. But that wasn’t what I posted about. The Moody and Goldman-Sachs reports caught my attention because they’re arguing on the basis of economics that cutting the budget by $61 billion will cost lots of jobs. That’s what my post and this whole thread is about. And I’m still waiting for somebody to present an informed argument against the Moody and Goldman-Sachs reports.

  40. sam says:

    @Charles

    “Now, why do you think they might be unwilling to lend to small businesses? ”

    Because the businesses don’t have any customers?

  41. Stan says:

    Sorry, charles austin, I was replying to your earlier post. But your most recent one isn’t any more convincing. You’re resorting to an ad hominem attack on so-called ivory tower economics, and I was referring to reports by profit-oriented business concerns. In what sense are Moody and Goldman-Sachs “ivory tower”? And if “ivory tower” is so awful, why did you waste your time and money at a university?

  42. anjin-san says:

    > Everything I’ve read suggests that the credit crunch for small business’s is coming from an unwillingness on the part of banks to lend to small businesses

    Our VP of leasing is in the office next to mine, and I catch a lot of the lease chatter. I am inclined to agree, based on what I have been hearing. Wells is the only bank that seems to be interested in that business at the moment.

  43. Terrye says:

    Over and over again I have heard Democrats and liberals give support to higher taxes on the grounds that taxes were higher during the Clinton years and the economy did pretty well..however, if that is true it is worth noting that spending was considerably less back then too and somehow or other there were jobs.

    And btw, didn’t these people also say that if we spent the money unemployment would stay down? They were wrong then weren’t they?

  44. rjs says:

    you may have noticed that the GDP for the 4th quarter was revised from 3.2% down to 2.8%, largely because state & local governments cut their spending by 2.4%…this highlights something that ive been trying to get at…with all the arguments about the mounting deficits, everyone seems to deal with it as a problem of how much spending you cut or how much you raise taxes…but it’s not that simple; the fiscal balance sheet is dynamic, and if government cutbacks push the country back into a recession, government revenues will fall, and the deficit may well increase… let me repeat that: cutting spending does not reduce deficits if the impact of the cuts is to push the country deeper into recession, because during a contraction, revenues from all sources shrinks…

    everyone’s thinking on this is too simplistic; cutting government spending may well increase the deficit…

  45. sam, nope. Try again.

    stan, FWIW, I started out in economics a long time ago, so I know a little bit about it, though I don’t pretend to be an actual economist or have the bona fides of, say, Steve Verdon. Many of us attended ivory towers for reasons that have little to do with being able to expound as though ivory towers are all we know. Yes, I’m sick to death of Keynesianism and its pernicious influence, but I digress.

    When did we get to the point that the government is going to drive the economy and bigger government is a greater good in and of itself instead of being something of a necessary evil we all accept and pay for? Yes, we are starting from very different assumptions here, but it seems to me that arguing to prime the pump is one thing (even if I don’t accept it) but morphing that into government spending is key and necessary to meeting GDP targets is entirely another. As King Theoden once remarked, “How did it ever come to this?”

    As I have said somewhere at least once before, we don’t take austerity measures to make the economy better in the short term, but in the long term because not taking them means even more pain in the future. Of course austerity measures are painful, ask any third world country the IMF has dictated terms to the last thirty years. But we insisted then they had to do it. So please explain to me why the medicine we prescribed for them won’t work for us.

  46. MT says:

    Where is the 400k government jobs cut number comming from? all reports show an increase in goverment jobs in the past 2 years. Unless you are counting Census workers this makes no sense but I am sure you wouldt try to mislead anyone by including those…

    Excluding postal and temp census workers, from Jan ’09 – jan ’11 the federal workforce has added 144k jobs, a 7% increase in this 2 year period.

    Same time period, private sector jobs have decreased by 2.9 million jobs, -2.6%

  47. An Interested Party says:

    Open your eyes, people, the problem is TOO MUCH SPENDING.

    I’m still waiting for anyone who believes this to propose a realistic plan to cut a trillion dollars from the budget…well, if they think that only spending cuts and no tax increases are the remedy…

    Of course austerity measures are painful…

    Yes, especially when such austerity measures are only imposed on the middle and lower classes…forget spreading the wealth around, how about spreading the pain around…

  48. anjin-san says:

    > When did we get to the point that the government is going to drive the economy

    Hmmm. Trying to remember anyone ever saying this. Drawing a blank. Citations?

  49. Raoul says:

    Federal government non-entitlement, non-defense and non interest represents 3% of GDP-cutting inflicts pains, hinders recovery w/o doing anything to the fiscal situation. There are less federal employees now than under JFK being much productive. Passing a lot of the work to the “private sector” – contractors, mercenaries often cost more than an actual government employee. Cutting an SSA job for example means a more time processing forms- when one says we that need to pass jobs from government to private side of things- what jobs are you actually talking about. National Parks, museums, what exactly. It would be nice if people edify themselves (and this goes to you AM) before spewing knee jerk opinions. The truth of the matter is government is very lean and efficient. Let’s stick to the real issue- medical treatment in the US- and why so many of you have any credibility after supporting Bush I do not know.

  50. Stan says:

    charles austin, I am not attacking your expertise as an entrepreneur. All I’m saying is that you and the other libertarians posting in this thread are too dismissive of Keynesian economics. In Keynes’s view, the economy is not self-correcting. He felt that counter-cyclical fiscal policy is desirable in the event of either an economic downturn or an unsustainable boom. This does not mean perpetual deficits. It means that the government should run a deficit during a recession and a surplus during a boom. In my opinion the experience of the period 1929 – 1941 validated his advice. In particular, I think that the sharp budget cutting you and other libertarians want and will probably get will lead to a repeat of the 1937 Roosevelt recession, and for the same reasons – overly stringent budget cutting at a time of high unemployment and weak demand. Now try convincing me that I’m wrong, and I promise to read what you say.

  51. An Interested Party says:

    While discussing tax cuts vs. spending cuts, this seems so fitting, and, as the man wrote, so true

    A unionized public employee, a teabagger, and a CEO are sitting at a table. In the middle of the table is a plate with a dozen cookies on it. The CEO reaches across and takes 11 cookies, then looks at the teabagger and says “Watch out for that union guy—he wants a piece of your cookie!”

  52. matt says:

    Today I learned that people believe that government employees apparently do not spend money on food cars or anything at all the money just vanishes never to be seen again.

  53. Have A Nice G.A. says:

    280k, lol, I still can’t get over that….

  54. anjin-san says:

    > 280k, lol, I still can’t get over that

    No surprise, since it is pretty much nonsense.

  55. Axel Edgren says:

    “280k, lol, I still can’t get over that….”

    I could jiggle some keys – would that break you out of the trance, you [silly little goose]?

  56. Axel Edgren says:

    “Today I learned that people believe that government employees apparently do not spend money on food cars or anything at all the money just vanishes never to be seen again.”

    That’s what Reasonoids and Cato’s slaves believe. Don’t mix them up with people.

  57. […] Moodys: GOP Spending Cut Plan Could Cost 700000 Jobs […]

  58. stan, I’m not dismissive of Keynesianism, I treat it with contempt. Keynes asked the right questions but that doesn’t mean he came up with the right answers. I think the historical record indicates that Keynesian manipulation of the economy does more harm than good, but arguing about it probably isn’t going to change any minds.

  59. […] to reports, including a Moody’s analysis that Alex Knapp wrote about the other day, Fed Chairman Ben Bernanke testified yesterday that the GOP’s […]