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How spending cuts hurt the economy -- dueling estimates

By Lex Haris, managing editor


NEW YORK (CNNMoney) -- The big spending cuts proposed by House Republicans could weigh on economic growth and jobs, but forecasts vary widely.

Economist Mark Zandi of Moody's Analytics said Sunday that if all $61 billion in proposed cuts for the rest of this year were enacted, the economy's growth could be reduced by half a percentage point. Many forecasters expect the economy to grow at around 3.5% this year.

By the end of the year, Zandi said, those spending cuts could cost the economy between 400,000 and 500,000 jobs.

"I think it's premature to engage in that kind of budget cutting," Zandi said. "We can't do that, I don't think, until the economy is off and running."

Zandi was speaking on CNN's State of the Union with Candy Crowley.

But economist Douglas Holtz-Eakin said that cuts would have a much smaller impact on growth: 2 to 3-tenths of a percentage point. "It's a rounding error," said Holtz-Eakin, who was a top economist in the George W. Bush White House and also served as director of the Congressional Budget Office.

Instead, said Holtz-Eakin, who was also on State of the Union, the budget cuts could ultimately have a positive impact by reducing the fear of increases in interest rates and taxes that deficits can cause.

The proposed spending cuts are "tiny," relative to the $15 trillion U.S. economy, said Holtz-Eakin. "The notion that somehow doing the right thing in this amount is going to harm us is just misplaced."

Zandi agreed that we need to address the deficits - just not yet. "We are not creating enough jobs to bring down unemployment. We need to have all the juice we can get to make sure that's happening before we go through these budget cuts."

Last week, Goldman Sachs economists said the impact of budget cuts could be far worse: 1.5 percentage points to 2 percentage points in the second and third quarters.

On Friday, economic growth in the fourth quarter of 2010 was revised sharply lower, to 2.8%, driven largely by budget cuts by state and local governments. To top of page

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