Slows the economy and fails

(Mark Zandi is chief economist of Moody’s Analytics, where he directs economic research. Moody’s Analytics, a subsidiary of Moody’s Corp., is a leading provider of economic research, data and analytical tools. Dr. Zandi is a cofounder of Economy.com, which Moody’s purchased in 2005. Dr. Zandi is on the board of directors of MGIC, the nation’s largest private mortgage insurance company, and is the lead director of policyMap, a data visualization and analytics company, used by policymakers and commercial businesses. He is a trusted adviser to policymakers and an influential source of economic analysis for businesses, journalists and the public. Dr. Zandi frequently testifies before Congress and conducts regular briefings on the economy for corporate boards, trade associations, and policymakers at all levels. Dr. Zandi is the author of paying the price: Ending the Great recession and Beginning a New American Century, which provides an assessment of the monetary and fiscal policy response to the Great recession. His other book, Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis, is described by The New York Times as the “clearest guide” to the financial crisis. Dr. Zandi is host of the Inside Economics podcast. Dr. Zandi earned his BS from the Wharton School at the University of pennsylvania and his phD at the University of pennsylvania., “The Debt Limit Drama Heats Up,” pg online @ https://www.moodysanalytics.com/-/media/article/2023/debt-limit-drama.pdf //um-ef)

The Limit, Save, Grow Act of 2023 would cut into near-term economic growth if passed into law. Compared with a scenario that includes a clean debt limit increase and no other significant changes to fiscal policy under current law, real GDp in the year ending in the fourth quarter of 2024 would be 0.65 percentage point lower (see Table 2).5 That is, in the Clean Debt Limit scenario, real GDp is expected to grow 2.25% in the year compared with 1.6% if Speaker McCarthy’s legislation becomes law. While the economy skirts recession in both scenarios, recession risks are uncomfortably high, with a consensus of economists and many investors and business executives expecting a downturn beginning late this year or early next. The timing of the government spending cuts in the Limit, Save, Grow Act is thus especially inopportune as it would meaningfully increase the likelihood of such a downturn. Indeed, under the legislation, GDp growth is so weak that employment declines in the first three quarter of 2024, and the unemployment rate rises by more than a percentage point to 4.6% by the fourth quarter of 2024. Compared with the Clean Debt Limit scenario, by year-end 2024, employment is 780,000 jobs lower, and the unemployment rate is 0.36 percentage point higher. The significant government spending cuts in the Limit, Save, Grow Act are substantial headwinds to nearterm economic growth. The cuts reduce nondefense outlays by $120 billion in fiscal 2024 compared with the Clean Debt Limit scenario, equal to about half a percentage point of GDp. The multipliers on this spending—the change in GDp a year after a change in spending—are estimated to be just over 1, as the programs suffering budget cuts are essential government services and tend to benefit lower-income households that quickly spend any support they receive from the government. Adding to the economic headwinds created by the legislation is the considerable uncertainty created by having to address the debt limit again a year from now. Given that 2024 is a presidential election year, that future debt limit drama may well be even more heated than the current one. This is sure to weigh on investor, business and consumer confidence and thus economic activity.