Pimco CEO El-Erian: Debt Ceiling Deal Will Lead To More Unemployment, Less Growth, More Inequality

The White House and congressional leaders last nightstruck a deal to raise the federal debt ceiling, agreeing to cut $1 trillion in spending over the next 10 years, create a special committee to find another $1.5 trillion in cuts, and instituting “triggers” that will lead to automatic cuts if the committee can’t come to an agreement. “Now, this process has been messy; it’s taken far too long. I’ve been concerned about theimpact that it has had on business confidence and consumer confidence and the economy as a whole over the last month,” said President Obama during a brief address last night. “Nevertheless, ultimately, the leaders of both parties have found their way toward compromise.”

But left out of the equation thus far is what impact those sorts of cuts will have on an economy struggling to recover from the Great Recession. Mohamed El-Erian, CEO of the bond investment firm Pimco, said yesterday that the deal will weaken the already fragile economy:

The potential budget agreement “does nothing to restore household and corporate confidence. So unemployment will be higher than it would have been otherwise, growth will be lower than it would be otherwise, and inequality will be worse than it would be otherwise.” [...] “We have a very weak economy, so withdrawing more spending at this stage will make it even weaker,” El-Erian said.

El-Erian added in an interview with Bloomberg, “When you look at the debt burden, there is a numerator and a denominator. We may end up creating so much damage to the denominator, which is growth of GDP, that what we do in the numerator, reducing the debt, may end up being insufficient.” This conclusion was also made by Nobel Prize-winning economist Paul Krugman, who noted today that the deal “will damage an already depressed economy“:

Slashing spending while the economy is depressed won’t even help the budget situation much, and might well make it worse. On one side, interest rates on federal borrowing are currently very low, so spending cuts now will do little to reduce future interest costs. On the other side, making the economy weaker now will also hurt its long-run prospects, which will in turn reduce future revenue. So those demanding spending cuts now are like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.

The House and the Senate could both vote on the debt ceiling deal today. While its possible that the special committee could look at revenue increases, House Speaker John Boehner (R-OH) has already vowed to appoint Republicans to the commission who will vote against any sort of new revenue.

UPDATE

Jared Bernstein, former chief economist to Vice President Biden, wrote today that “these cuts will hurt our ability to pursue what I view as most positive aspects of the President’s economic agenda — investment in infrastructure, clean energy, research, education. They will pinch programs that are already budget constrained…programs that help low income people with child care, housing, and community services.”