Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

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

Index Last Change % Change
Dow 16,204.97 -211.61 -1.29%
Nasdaq 4,363.14 -146.41 -3.25%
S&P 500 1,880.05 -35.40 -1.85%
Treasuries 1.85 -0.02 -0.86%
Data as of 6:25am ET
Company Price Change % Change
Bank of America Corp... 12.95 -0.30 -2.26%
Facebook Inc 104.07 -6.42 -5.81%
Freeport-McMoRan Inc... 5.68 -0.04 -0.70%
Microsoft Corp 50.16 -1.84 -3.54%
General Electric Co 28.54 -0.64 -2.19%
Data as of Feb 5
Sponsors

Sections

Anheuser-Busch has been the exclusive beer advertiser featured during the Super Bowl since 1975, and it's spent more on Super Bowl advertising than any other company for the last five years in a row. More

The economy is better than it was, but not even President Obama is ready to declare it's booming. More

Laurie Segall sits down with Foursquare's new CEO Jeff Glueck to discuss the company's latest round of funding at a lower valuation, and their hybrid consumer/enterprise business model. More

Nonprofit JumpStart has launched a new $10M fund that will only invest in women and minority-led startups. The catch: You have to move to Ohio. More

Portland, Oregon, is often described as the last affordable cool city on the West Coast. But as more people move to the city, it's becoming increasingly unaffordable. More