“It’s slowing down the economy, but not significantly,” economics professor Justin Wolfers said of the ceiling agreement reached between House Speaker Kevin McCarthy and President Joe Biden.
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This week, The bipartisan Congressional Budget Office has looked at the debt limit proposal and found that government spending would fall by about $1.5 trillion over the next decade if the deal goes into effect.
And government spending can certainly have a major impact on the economy. Just look at what happened after the government increased spending and gave people relief checks during the pandemic, said Laura Veldkamp, an economics professor at Columbia: People went out and spent them.
“It’s an increase in demand. Demand comes when we buy things, so people got money to do just that,” she said.
On the other hand, Veldkamp said cutting government spending could reduce demand in the aggregate economy, which the Federal Reserve is trying to achieve by raising interest rates.
Federal spending cuts could make the Fed’s job easier, she added. “If there’s less demand for things, if there’s less buying and investing by companies, that’s going to put less pressure on prices.”
Here’s the thing: There’s a lot of government spending that won’t be cut by the debt ceiling agreement. The focus is on limiting discretionary spending — money the government uses to fund various agencies and programs.
And “discretionary spending accounts for a third of all government spending,” said Justin Wolfers, an economics professor at the University of Michigan. “And half of that is military spending, which Republicans didn’t want to touch.”
This week, JPMorgan and Goldman Sachs assumed the deal would fall through Only about one tenth to two tenths of a percentage point of the total gross domestic product.
“It’s slowing down the economy, but not particularly significantly,” Wolfers said.
To be clear, Wolfers added that’s not a bad thing. Finally, the economy may not need to slow down, stressed Josh Bivens, chief economist at the Economic Policy Institute.
“I think the unemployment rate that we have today is not too low in my opinion. I don’t think this creates excessive inflationary pressures; I think it mostly translates into pretty good wage growth,” he said.
On the other hand, the agreement’s expanded work requirements for certain benefits could result in fewer people receiving those benefits.
“Essentially, this means there is an additional administrative burden for people to get these benefits,” said Menzie Chinn, an economics professor at the University of Wisconsin.
And that part of the deal would have an outsized impact on more vulnerable parts of the economy.
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