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Chairman Ben Bernanke said on Wednesday a Republican spending cut plan would not cause a big dent to U.S. economic growth, but could cost around 200,000 jobs over two years.
That estimate is at odds with losses of as much as 700,000 cited by Democrats but also clashes with forecasts of job gains Republicans have pointed to.
Bernanke said that a $60 billion cut along the lines being pursued by Republicans in the House of Representatives would likely trim growth by around two-tenths of a percentage point in the first year and one-tenth in the next year.
“That would translate into a couple of hundred thousand jobs. So it’s not trivial,” he said in response to questions from members of the House Financial Services Committee.
Pressed on how such job losses would affect the recovery, Bernanke said that in spite of concerns about the longer-term budget deficit, the Fed’s focus is on reducing unemployment.
“I would like to see job creation,” he said. “What I have been trying to focus on is, we have got to keep our eye on deficit reduction, but we need to think about it in a long-term framework.”
The Republican-run House has passed a budget bill for the current fiscal year that includes $61 billion in spending cuts, but majority Democrats in the Senate say the reductions would endanger the economic recovery.
Any spending legislation must be approved by both chambers of Congress before it can become law.
Members of Congress are locked in a bitter fight over the budget, with Republicans, spurred on by Tea Party fiscal conservatives, having made deep spending cuts and immediate deficit reduction a top priority.
The Senate on Tuesday approved a House-passed bill to extend government funding for two more weeks that contains $4 billion in relatively non-controversial spending cuts.
House Republicans see that as just a down payment on their larger goal, and while the bill averts an imminent shutdown of the federal government, it does nothing to resolve the ongoing budget tussle.
In November, the Fed launched a controversial $600 billion bond-buying program to boost the recovery and spur job growth. Although the unemployment rate dropped to 9 percent in January, Fed officials say it remains too high.
Bernanke on Wednesday said a failure to bring down unemployment could end up undercutting the recovery. Economists expect a report on Friday to show the jobless rate edged up to 9.1 percent in February.
Bernanke’s estimate that 200,000 fewer jobs would be created represents just a little more than 0.1 percent of the current U.S. labor force. Over the past 12 months, the economy has created 82,000 jobs per month, on average, although economists believe the pace of employment growth is quickening.
Economist Mark Zandi, who has advised congressional leaders of both parties, estimated that the Republican proposal would lead to 700,000 fewer jobs by the end of 2012.
House Speaker John Boehner‘s office earlier this week cited an analysis by prominent Stanford University economist John Taylor saying estimates of job losses were flawed.
“A credible plan to reduce gradually the deficit will increase economic growth and reduce unemployment by removing uncertainty and lowering the chances of large tax increases in the future,” Taylor wrote.
Goldman Sachs economist Jan Hatzius estimated that the larger spending cut bill would trim 1.5 to 2 percentage points off of the annualized economic growth rate in the second and third quarters of this year.
Some of that pullback was already built into Goldman’s GDP forecast for 4 percent annualized growth in the second quarter.
“Federal government spending enters directly into the Commerce Department’s GDP estimates, so unless there is a full offset from other components of GDP a reduction in federal government spending must reduce GDP on impact,” Hatzius wrote in a note to clients.
Bernanke told lawmakers said he did not know why the Fed’s analysis was different than those of private forecasters.
In a separate speech in New York later on Wednesday, Bernanke said the improving economic climate should take some of the pressure off of state and local governments who have been under severe fiscal strain following the downturn.
However, the modest pace of growth means it will be a while yet before state and local fiscal conditions return to normal, although municipal bond markets are calmer now that steps are being taken to address budget shortfalls, he said.
Copyright © 2011 Reuters