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.
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.
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.
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: