Former White House adviser Larry Summers says that, because time is of the essence, the size of any budget deal between Congress and the White House is far less important than how that deal will affect job creation.
"Very little hinges on whether the deal picks up the low-hanging fruit with respect to entitlements and revenues — or even breaks some new ground — this year or in the next couple of years," Summers writes in the Financial Times.
“Given the current weakness of the U.S. economy, what is most important is that any budget deal be pushed forward as soon as possible.”
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However, decisions about spending and taxing for the next year or two will have a significant impact on job creation during the next year, the economy over the next decade and on the path of U.S. national debt over an even longer horizon.
"Suppose any proposed deal could be adjusted, thereby adding an extra one percent to gross domestic product growth over the next year," says Summers. The increase in output might not be sustained as inflation slows down, investment is increased and fewer workers abandon the search for jobs.
"Assume the impact falls from 1 per cent to zero over the course of a decade," Summers says. “The consequence would be an increment to GDP of 0.5 percent or about $1,000 billion."
Such an impact “would reduce deficits by about $400 billion — more than it looks like Democrats will be able to come up with in revenue raising or Republicans in cuts to the cost of healthcare," Summers says.
Allheadlinenews.com reports that, according to a Federal Bank of Cleveland study, the U.S. economy is forecast to grow by only 1.1 percent in the 12 months ending June 2012.
That rate is less than half of the central bank’s current forecast and would likely result in delaying any key lending rate increase.
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