What the Debt Deal Means for Jobs and the Economy

Last Updated Aug 10, 2011 10:57 AM EDT


President Obama signed the bill to officially raise the debt ceiling last week, 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 in cuts 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.

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

MW: If there is a delay on spending cuts, would that be better for the economy?
JB: Absolutely. I think the more delayed, the better. In the long run, this is good because the government does need to try to limit the amount of debt it creates. But I'm worried that we are not going to get back to full employment for a long time, so even if we're talking three to four years before these cuts go into place, the economy's recovery will still be fragile. And that will hurt us in terms of income growth, and will keep revenues from getting up to the point where they should be to reach full employment.

MW: Some economists argue that the immediate impact of a deal could have positive effects on spending by improving consumer confidence. Do you think this is a valid argument?
JB: I don't think it's going to have much of a positive impact on confidence. I think we already see that based on the stock market reaction to this. It's not been a very positive signal.

MW: Which cuts do you think will hurt the economy the most?
JB: There will probably be cuts in infrastructure spending and cuts in education spending. I think these have really negative long term impacts. Borrowing is good if you're borrowing for investment. That helps production and corporations can pay that off down the road. I think we've taken an attitude that government spending is always unproductive, but I think we're hurting ourselves in the long run by curtailing infrastructure and education spending. There's strong return on that, and this is going to erode our position down the road.


MW: Were there ideas being discussed in recent weeks that you think didn't receive enough attention?
JB: There was a lot of talk about introducing a balanced budget amendment; I think this would be catastrophic. The only tools we have to prevent us from going into great recessions are monetary policy and fiscal policy. In terms of monetary policy, we have zero interest rates now so there's no source for stimulus there. On the fiscal side, state and local governments cannot run budget deficits, so the only remaining tool to prevent depressions is stimulative fiscal policy. If we introduce a balanced budget amendment, we would be ruling out the last tool available for preventing great depressions in this economy.

MW: Do you think we will stay around the recent jobless rate of around 9 percent?
JB: Yes, I think for the remainder of the year, we're going to see unemployment hovering at or above 9 percent. No dramatic increases, but staying between 9.2 and 9.5 percent.

MW: What do you think the chances are now of a double-dip recession?
JB: I think it's unlikely that we're going to see a double dip in terms of actual contraction. What I see is subpar growth, remaining at 2 to 2.5 percent growth, [which will] not allow unemployment to fall. A year from now, I see our situation with employment being about the same as where it is now, unfortunately.

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