Mendoza School of Business

What the Debt Deal Means for Jobs and the Economy

Published: August 3, 2011 / Author: Drew Gannon

Obama signed the bill to officially raise the debt ceiling
on Tuesday,
marking the end of a political stalemate that threatened to irreversibly damage
the United States’ financial standing. But how will the new debt deal, which
has provisions for up to $2.4 trillion incuts to government spending
and entitlement programs over the next 10 years, affect the greater American
economy, particularly employment? Jeffrey Bergstrand, a professor of finance at
Notre Dame University and a former economist with the Federal Reserve Bank of
Boston, spoke with CBS MoneyWatch about implications of the debt agreement for
our country’s economic growth and jobs picture.

How do you think the cuts in government spending that are part of the debt deal
will affect employment in the U.S.?


They will prevent economic growth over the next 12 months from exceeding 2.5
percent, which means low employment growth. The driving source of demand in the
economy is consumption spending, investment spending by firms, and government
spending. Consumption spending by households is very tepid right now because we
have very high unemployment and a lot of uncertainty about the economy. With
the government spending held in check, there’s just very little stimulus to
aggregate demand and to the economy… What I’d be really interested in seeing is
how much of a delay there is [in enacting these cuts]. A lot of the cuts to
government spending are pushed back into the future. I have not seen the
details on those since this is just the early stage.

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