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Debt-Ceiling Deal Could Bite Economy: The Ticker

Drag on Economic Growth

By Mark Whitehouse

The deal reached in Congress to raise the $14.3 trillion debt ceiling won't necessarily sink the U.S. economy. But the mechanism it has put in place for further deficit reduction has the potential to deal a heavy blow.

Economists at consultancy Macroeconomic Advisers parsed the latest debt deal to get a sense of its impact on the economy. By their estimate, the first part of the deal, which entails some $917 billion in spending cuts over the next decade, won’t be too painful. Ignoring multiplier effects, such as how consumers might change their behavior, the decrease in government spending would shave a bit more than 0.1 percentage point from growth in fiscal 2012 and less in subsequent years.

The deal, though, has a second part. If legislators fail to agree on at least another $1.2 trillion in deficit reduction by the end of this year, automatic cuts will take effect. Those cuts, according to Macroeconomic Advisers, could shave more than 0.7 percentage point from economic growth, bringing the total drag for fiscal 2013 to about 0.8 percentage point. That's a lot, given that economists expect inflation-adjusted growth to be only about 3 percent that year.

In other words, the high drama in Congress probably won’t end with the debt-ceiling deal. We may have another cliffhanger before the year is done.

-0- Aug/02/2011 17:26 GMT

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