Government shutdown, economy slowdown? | FT Alphaville

Government shutdown, economy slowdown?

Well, it’s a start.

The FT reported Monday evening that the House of Represenatives will on Tuesday vote on a two-week continuing resolution (CR) that funds the federal government through March 18 and reduces FY 2011 discretionary authority by $4bn.

Politico adds that the White House and Senate Democrats may “double down” and try to extend the CR to $8bn and 30 days in order to amend the proposed reductions. Time is money, after all.

Moody’s Analytics’ Mark Zandi worries, like Goldman Sachs, that FY2011 cuts will reduce real GDP growth. Based on the Republicans’ proposal on Friday to reduce discretionary spending by about $60bn in FY2011 from FY2010 levels, he estimates 0.5 and 0.2 per cent reductions in 2011 and 2012 growth, respectively.

(The proposed CR figures suggest that a package to fund the government through FY2011 could be closer to $40bn, if/when it is finally agreed.)

We don’t know what multipliers are assumed here and whether different ones are applied to different programmes on the chopping block. If you’re interested in getting (re)involved with the debate on the merits of stimulus, John Taylor has a critique of the Goldman/Zandi work.

We will note via Taylor, however, that talk of cuts in FY2011 needs qualification. The proposed cuts won’t all happen this fiscal year. According to the CBO’s analysis, the Republicans’ $60bn of cuts would amount to around $19bn in FY2011: $1,356bn rather than the current $1,375bn appropriated for discretionary spending. The additional $41bn would kick-in later.

Departments and agencies may well make the necessary cuts early in anticipation of reduced outlays in FY2012. But it helps to be accurate on the when and where they will kick-in, especially when looking at the sensitivity of the private sector to public sector spending.

Of course, the current flim-flam of a logjam is mostly politics — though it will set the baseline terms of future reductions — and not as potentially damaging as the debt ceiling debacle, itself often exaggerated. But with both sides of the argument eager to beef up the numbers, it pays to be careful.

We’d politely suggest that a little bit more attention on making sure the cuts are sensible when they do happen would be a better endeavor, especially as the twin headwinds of oil price rises and local government cuts continue.

Related links:
Congress nears deal to avert shutdown – FT
USA, incorporated and indebted – FT Alphaville
Stimulating, selectively and statistically significantly – FT Alphaville