Capitol Hill Bureau Chief
Federal Reserve Chairman Ben Bernanke waded into a heated Washington debate Tuesday when he predicted that federal spending cuts proposed by House Republicans would not damage economic growth to the extent that two recent reports have predicted.
House Republicans voted in February to slash $61 billion from the 2011 federal budget. Since then, Democratic leaders in both chambers have circulated two reports
-- one from Goldman Sachs and one from Moody's -- that say such spending reductions would significantly damage the U.S. economy.
The Moody's report, from economist Mark Zandi, predicted that the GOP budget proposal would cause the economy to lose as many as 700,000 jobs, while Goldman Sachs predicted the cuts would slow GDP growth by as much as 2 percent in the second and third quarters of 2011.
Sen. Chuck Schumer (D-N.Y.) said in a statement last week that the House cuts are "a recipe for a double-dip recession" and said the Goldman Sachs report in particular put "a dagger through the heart of their 'cut-and-grow' fantasy."
On Monday, House Majority Leader Eric Cantor dismissed the Moody's report entirely: "I would note that Mr. Zandi was a chief proponent of the Obama/Reid/Pelosi stimulus bill that we know has failed to deliver on the promise of making sure unemployment did not rise above 8 percent."
But speaking with senators on Capitol Hill Tuesday, Bernanke took issue with the reports and their predictions of dire consequences if the Republican proposal were to pass the Senate.
"A $60 billion cut obviously would be contractionary to some extent, but our analysis does not get a number quite that high," Bernanke said of the job losses predicted by Moody's and the economic damage predicted by Goldman Sachs. "I have to say we get smaller impact than that." Instead, Bernanke said that the cuts would likely slow economic growth by "several tenths" of a percent and that the lost jobs would be "much less than 700,000."
Although Republicans may feel vindicated by Bernanke's remarks, he did add that the proposed GOP cuts would not grow the economy in the short term.
"It would of course have the effect of reducing growth on the margins certainly," he said. "It would have a negative impact, but 2 percent? I'd like to see their analysis. It seems like a somewhat big number relative to the size of the cut."
The Fed chairman later stressed that the long-term spending trajectory of the United States is "not sustainable" and urged lawmakers to make a long-term commitment to cutting federal spending over a number of years.