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To Omaha economist Ken Kriz, this week's decision in Washington to pull more money out of the economy is hardly the best medicine when a jobless recovery is teetering on the brink.
He and some other economists see the sudden shift from government efforts to stimulate the economy with spending to a new government austerity as only increasing the chance that the U.S. economy could fall back into recession.
"It was the wrong battle at the wrong time, and there will be consequences,'' said Kriz at the University of Nebraska at Omaha. "The last thing we should be doing is worrying about long-term deficits.''
While economic assessments are mixed over the plan to lift the nation's borrowing limit and cut spending that was signed into law Tuesday by President Barack Obama, nearly all the economists interviewed agreed that it's not without risk.
The peril and uncertainty were underscored later Tuesday by the national economic panel that officially dates recessions. One member put the odds of double-dipping into recession at 50 percent.
But for some economists, that risk is overridden by the economic benefits that come from assuring the world that America is serious about tackling its mounting debt. They see potential in the plan to ultimately help the country out of its economic malaise.
"Showing we're getting a handle on this large debt problem is critical to the eventual return of prosperity in the United States," said Eric Thompson of the University of Nebraska-Lincoln's Bureau of Business Research.
The economists do seem to agree on one thing: The matter wasn't handled very well. For weeks, the previously unthinkable idea that the United States could default on its debt seemed to be a real possibility. It took a last-minute deal to raise the debt ceiling and avoid a default, something not likely to improve the Treasury Department's standing as the world's safest investment.
Iowa State University economist Peter Orazem called the 7 percent drop in the stock market over the past couple of weeks "an expensive price for dithering over something you had to do.''
"When the government starts to talk about whether they are going to make good on obligations ... that's not the way you do business,'' he said. "It doesn't speak well of the quality of leadership we have in Washington, and I don't think that's a partisan statement.''
The Senate on Tuesday joined the House in passage of the compromise plan to reduce red ink by $2.4 trillion over the next 10 years. It includes some $900 billion in scheduled cuts and some $1.5 trillion in cuts or new taxes that are to be worked out by a bipartisan panel.
Probably as a nod to concerns about cutting government spending too quickly, the cuts are modest over the next two years — $21 billion in 2012 and $42 billion in 2013. That is estimated to produce a drag on the overall economy of about .2 percent in 2012 and .5 percent in 2013.
But while those cuts are relatively small, economists point out that they add to a 1.5 percent estimated reduction in growth next year coming from the expiration of past stimulus programs. Also due to expire next year are extended unemployment benefits and the temporary 2 percent payroll tax cut.
And that comes as the economic recovery is clearly slowing down, with current economic growth running at an annual rate of only 1.3 percent.
"There is a risk to the recovery that a large amount of fiscal drag is coming at a time when the economy is struggling," said Peter Hooper, chief economist for Deutsche Bank Securities in New York.
But others say mounting debt is a major concern that needs to be tackled in a big way.
Orazem said government spending as stimulus makes sense in an emergency but shouldn't be maintained over a long period. The path out of recession is rapid economic growth, and that has to be fueled by the private sector, he said.
Orazem, Thompson and Creighton University economist Ernie Goss said cutting budget deficits and reducing the nation's debt could boost the confidence of the business community and create a climate for job growth.
Some observers expressed disappointment that the plan didn't take a bigger swipe at the deficit. At one point, congressional leaders had agreed to a package of some $4 trillion before backing away from it.
"The sad part is they were very close to a combination of spending reduction and revenue that really would have made a significant difference,'' said B.J. Reed, dean of UNO's College of Public Affairs and Community Service. "When we'll get that chance again, I don't know.''
But he agreed that even what was passed is a gamble. "When you create this kind of austerity during a significant economic downturn, it's high-risk,'' he said. "You have an economy that is clearly slowing down and may be ready to go back into recession.''
UNO's Kriz said he doesn't want to minimize the country's debt problem. But current debt levels are manageable, he said, and annual budget deficits already are projected to drop significantly even without the plan.
The big deficits are largely a function of the worst recession since the Great Depression. The recession caused tax revenues to plummet and spending on assistance programs to rise. Those conditions will change as the economy ultimately improves, he said.
Kriz said other major contributors to the deficits were the wars in Iraq and Afghanistan, which are winding down, and President George W. Bush-era tax cuts, set to expire after 2012.
If the current levels of debt were such a problem, Kriz said, you wouldn't see interest rates so low or so many investors around the world putting their money into U.S. bonds.
"This was simply a crisis of our own choosing,'' he said.
Goss said neither backers nor opponents should overstate the plan's impact on the economy's big picture.
He noted that the stock market staged a small rally on news of the debt agreement Monday. But dismal economic news on manufacturing later in the day and on consumer spending Tuesday sent the market back into a retreat.
"Economic things are much more important than this,'' he said.
This report includes material from Bloomberg News.
Contact the writer:
402-444-1130, henry.cordes@owh.com
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