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A Federal Shutdown Could Derail the Recovery

February 28, 2011 Comments off

A Federal Shutdown Could Derail the Recovery (PDF)
Source: Moody’s Analytics (via Washington Post)

+ Odds are uncomfortably high that the federal budget impasse will prompt a government shutdown.

+ The Obama administration has shown significant spending restraint in its recent budget, but House Republicans want deeper cuts.

+ While cuts and tax increases are necessary to address the nation’s long-term fiscal problems, cutting too deeply before the economy is in full expansion would add unnecessary risk.

+ The House Republicans’ proposal would reduce 2011 real GDP growth by 0.5% and 2012 growth by 0.2%. This would mean some 400,000 fewer jobs created by the end of 2011 and 700,000 fewer jobs by the end of 2012.

+ A government shutdown lasting longer than a couple of weeks would do much more damage to the economy.

+ Lawmakers are likely to split the difference between the administration and House Republican proposals. This isn’t ideal fiscal policy, but the economy will be able to manage through it.

+ A compromise could send an encouraging signal about the more serious budget battles to come.

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