Would the GOP’s ‘Cut, Cap and Balance’ plan really cost 700,000 jobs?

July 18, 2011

This is the Democratic talking point: Cutting spending by $111 billion, as some Republicans want to do, would cost the economy 700,000 jobs.  Now I will admit that I am not sure if those are jobs somehow not created, jobs somehow not saved or what exactly.

But the basic point is that less government spending means fewer jobs. But to believe that, you also have to believe that more government spending means more jobs.  Just ask Moody’s.com economist Mark Zandi who had this to say in February about an earlier GOP plan to cut spending by $61 billion (and is the apparent source of the meme):

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.

And recall that Zandi had this to say about the Obama’s $800 billion stimulus:

Nonetheless, the effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4%, holding the unemployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls. These estimates of the fiscal impact are broadly consistent with those made by the CBO and the Obama administration.

I have expressed my doubts about this before, as has economist John Taylor who, after examining data as opposed to models, concludes this about the Obama stimulus (bold is mine):

Individuals and families largely saved the transfers and tax rebates. The federal government increased purchases, but by only an immaterial amount. State and local governments used the stimulus grants to reduce their net borrowing (largely by acquiring more financial assets) rather than to increase expenditures, and they shifted expenditures away from purchases toward transfers. Some argue that the economy would have been worse off without these stimulus packages, but the results do not support that view.

Here is another way of looking at why the stimulus didn’t function as projected — and why the GOP budget cuts wouldn’t hurt the economy:

Unfortunately, we find substantially smaller government spending multipliers than those used by Romer and Bernstein. For example, the multiplier associated with a permanent increase in government spending by the end of 2010 lies between 0.5 and 0.6. In other words, government spending does not induce additional private spending but instead quickly crowds out private consumption and investment.

We also provide an assessment of the impact of the American Recovery and Re-investment Act. This legislation implies measures amounting to $787 billion and spread over 2009 to 2013 but peaking in 2010. Our estimate of the total impact is closer to 1/6 of the effect estimated by Romer and Bernstein. By 2010 we project output to be about 0.65% higher. Using the same rule-of-thumb as Romer and Bernstein, this increase in GDP would translate to about 600,000 additional jobs rather than three to four million.

So if the GOP plan cost any jobs, it might be in the tens of thousands. And that number might be more than offset by massive new hiring caused by the decrease in business and consumer uncertainty. Deep cuts in spending, hard spending caps and a balanced budget amendment would go a long way toward removing the threat of fiscal crisis from the fiscal horizon. If only the EU could say the same right now.

Kill jobs? The GOP plan would potentially be a powerful job creator.





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I guess everyone’s confused and so am I.

Posted by doctorjay317 | Report as abusive

Way back in the day, a cow would get sick and the villagers would say: “she’s got the hollow horn.” Sure enough, they’d cut her horns off and they would be hollow. The cow would eventually get better and the villagers would say: “you see – we got rid of those horns and she got better.” This is pretty close to the Republican economic plan.

Posted by dareus | Report as abusive

I don’t know where Reuters got Mr. Pethokoukis, but they need to get rid of him. He’s not only totally biased toward the Republicans, but many of his ideas are truly ludicrous. A decrease in government spending of $111 billion would most certainly have a negative impact on employment in the US. There is no way you can cut spending by that amount without job losses in both the public and private sector. There will not only be direct job losses resulting from reductions in various government programs and the department of defense, there will be a trickledown effect to the private sector resulting from the reduction in goods and services purchased. Our country’s exploding deficit was caused by years of Bush era tax cuts, 2 wars started under the Bush administration and stimulus bills passed by both Republicans and Democrats. Anyone who thinks we can address this problem with spending cuts alone (without pushing this country into another recession) is “smoking weed”. We need a balanced approach – including both well-timed spending cuts and increased tax revenue.

Posted by weneedchange | Report as abusive

Anything that takes money out of the economy kills jobs. Both tax increases and spending cuts take money out of the economy. It’s as simple as that. So, anything that reduces deficit spending, while helping our nation’s fiscal position in the long run, will drag down the economy in the short run.

By the way, nothing is more effective at sucking money out of the economy than the trade deficit – about $600 billion per year – much more than anything being discussed in the debt ceiling/budget deficit debate.

Posted by Pete_Murphy | Report as abusive

Taking my money and giving some of it back in the form of misguided programs (The presidential dollar coin fiasco comes to mind) can never be more efficient than letting me keep the money and spending it on something that I want or need. The money I keep goes directly into doing something usefull, while the money the government takes always has a pretty high collection and adminitrative costs before it is ever spent. We don’t need the “balanced” approach of tax hikes now and maybe cuts later that the dems are proposing. This will encourage the politicians to get us into even more wars, and to spend ever more money on wastefull give aways as part of their campaign to get re-elected. The cycle of tax and spend needs to be interupted. Keep on writting Mr. Pethoukokis you are correct.

Posted by zotdoc | Report as abusive

[…] House Republicans’ proposal would reduce real GDP growth by 0.5% and 2012 growth by 2%, and cost the economy 700,000 jobs.  Economist John Taylor, looking at actual data rather than Keynesian computer models, said […]

Posted by House Speaker John Boehner’s Friday Press Conference. « American Elephants | Report as abusive