Fiscal policy: Cutting recovery short | The Economist: REPUBLICANS are pushing to slash federal government spending in the present fiscal year. If they don't get their way, the government will shut down. And if they do get their way?
Spending cuts approved by House Republicans would act as a drag on the U.S. economy, according to a Wall Street analysis that put new pressure on the political debate in Washington. The report by the investment firm Goldman Sachs said the cuts would reduce the growth in gross domestic product by up to 2 percentage points this year, essentially cutting in half the nation's projected economic growth for 2011.
That's just one estimate, of course. It's also possible that the Fed would react to these deep cuts by pursuing a more expansionary monetary policy than they'd planned, but the British example suggests that rising commodity prices may make this balancing act difficult.
What really makes this so upsetting, and it's really, genuinely upsetting, is that these proposed cuts are basically useless. America doesn't face a short-term fiscal crisis; its debt is dirt cheap. America faces a long-term fiscal crisis due to projected increases in government health spending. So Republicans are cutting short-term discretionary spending to address a fiscal crisis that doesn't exist while ignoring the fiscal crisis that does exist. Their proposed cuts aren't emerging from any cost-benefit analysis; rather they seem designed to spare GOP interests at the expense of Democratic interests. And to do this, they're prepared to—potentially—cost the American economy 2 percentage points of growth.
It's really remarkable. It's remarkable how things have deteriorated in so short a time. Last year, the president's bipartisan deficit commission recommended deficit cuts that didn't focus on the short-term, and that did put defence and entitlements on the table. Now Republicans are declaring that they'll shut down the government unless all of their demands are met—demands with virtually no redeeming value. This is no way to govern. No way at all.