Tuesday, August 2, 2011

Deficit-Reduction Plan Would Threaten Economic Recovery, Not Remove Downgrade Threat

NEW YORK -- The deficit-reduction deal that emerged late Sunday runs the risk of exacerbating two opposite problems at the same time: It cuts enough government spending to imperil a weak economy, yet not enough to spare the United States from the prospect that its credit rating will be downgraded.

The plan would cut $2.4 trillion in federal government spending over the next decade, an initiative that economists say could harm the economic recovery as growth remains painfully slow. With home prices falling, the unemployment rate rising and gross domestic product expanding at a rate that's worryingly close to zero, federal spending cuts or tax increases could hinder what little progress is being made, experts say.

But seen another way, the deficit-reduction plan might not be big enough: It falls short of the criteria that the credit rating agency Standard & Poor's alluded to last week. Fears that the U.S. government's debt might be downgraded have not been allayed, with some experts saying a downgrade could come this week.

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