Economic Policy Institute: US Debt Deal Will Cost 1.8 Million Jobs

August 2, 2011Marketsby EW News Desk Team

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As US politicians from both parties continue to pat themselves on the back for successfully reaching a compromised debt deal, the Economic Policy Institute (EPI), a top nonpartisan think tank, warned on Monday that the deal struck to raise the nation’s debt limit may end up costing the economy 1.8 million jobs by 2012.

According to EPI’s Research and Policy Director John S. Irons, the debt deal “not only erodes funding for public investments and safety-net spending, but also misses an important opportunity to address the lack of jobs.”

While US$1 trillion in spending cuts are likely to be spread over 10 years – with the bulk of the cuts coming in the later half – the EPI suggested that the near-term cuts are still likely to have a significant impact on the job market.

Related: Debt Deal Ok'ed - US Debt Ceiling Now $14.29 Trillion

“Applying conventional multipliers, the reduction of $30.5 billion in calendar year 2012 would reduce GDP by 0.3 percent, and result in roughly 323,000 fewer jobs.”

In addition, the EPI noted that the debt ceiling agreement failed to take into account two existing job policies, the payroll tax holiday and the extended unemployment insurance, which will expire at the end of 2011.

As a result, the cumulative impact of the debt ceiling deal as forecasted by the EPI could be a loss of 1.822 million jobs and a reduction of US$241 billion in the nation’s GDP.

Source: Economic Policy Institute

Numerous economists have also weighed in on the negative impact of the debt deal. In his column for the New York Times, Paul Krugman labelled the deal as a “disaster” and a “catastrophe on multiple levels” for both the Obama administration and the Republican representatives in Congress.

“It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status,” said Krugman.

PIMCO CEO Mohamed El-Erian have also warned that the debt deal is likely to lead to more unemployment, less growth and more inequality.

El-Erian told ABC News that the deal “does nothing to restore household and corporate confidence. So unemployment will be higher than it would have been otherwise, growth will be lower than it would be otherwise, and inequality will be worse than it would be otherwise.”

Krugman was more blunt:

“Slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.