Careful with the economy

Lawmakers in Washington are expected to pass another short-term spending bill soon to keep the government operating for another few weeks, but they’ve been unable to agree on a broader measure that would fund operations for the remaining six months of the fiscal year. House Republicans, many of whom pledged during their campaigns to seek $100 billion in immediate cuts, are holding out for at least the $61 billion in reductions approved by the House last month — as well as provisions blocking implementation of the healthcare reform law and numerous environmental regulations. Leading Senate Democrats have agreed to about $10 billion in reductions, but would prefer to postpone deeper ones at least until the next fiscal year.

The best way to reduce the deficit, however, is not simply through spending cuts but also with faster economic growth. And although the U.S. economy is picking up steam, considerable threats to the recovery are looming. Home prices are dropping again, and the slide is likely to be prolonged by the vast number of houses awaiting foreclosure. Unemployment remains stubbornly high. Turmoil in the Middle East has driven oil prices back over $100 a barrel, their highest since mid-2008. The price of food and some key commodities is climbing fast, raising fears about inflation.

Last week a new threat emerged: the damage that earthquakes and a tsunami are inflicting on Japan, the nation with the world’s third-largest economy. The shock to Japan’s system could have any number of effects on the United States — it could push gas and food prices even higher, for example, or interrupt the supply of microchips, car parts and other critical technology components. It also could reduce the demand for some high-end U.S. exports.

It’s possible that these effects will, in the end, be short-lived or nonexistent. But the uncertainty should be enough to dissuade lawmakers from making dramatic spending cuts now that could lead to significantly fewer jobs being created. Federal Reserve Chairman Ben S. Bernanke warned a congressional committee recently that slashing $60 billion at this stage would probably slow economic growth enough to result in 200,000 fewer new jobs over the coming two years. Other economists have predicted that the reductions would claim 700,000 jobs or more.


Some conservatives argue that Washington’s deficit spending is the problem, not the solution to the sluggish economy, but there’s little or no evidence to suggest that the cuts sought by the GOP would increase employment or boost economic activity. That’s not to say that Congress can stay the spending course indefinitely and count on a growing economy to solve the problem — it can’t. But there’s a real risk to slamming on the federal brakes when the private sector isn’t fully up to speed.

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