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article imageUS: Fears of deep economic recession as fiscal austerity looms

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By JohnThomas Didymus     Feb 2, 2013 in Business
Washington - Liberal analysts are warning that a deep recession could follow implementation of spending cuts and that the experience of Europe points to the significance of government spending in a weak economy.
Analysts are warning that austerity measures or sequestration could plunge the US economy into a devastating recession that could have global ripple effects.
The Hufffington Post reports that Chad Stone, an economist with the Center on Budget and Policy Priorities, said: "Austerity has been terrible for Britain and the rest of Europe. We've not been as bad as them, but we haven't given our economy the support it needs."
Analysts say that the economy is in a weak recovery period and that any further spending cuts will threaten recovery prospects. Rather than talking about implementing spending cuts that have economic contractionary effects, President Obama and the Congress should be talking about how to raise employment levels through policies that boost job growth and stimulate the recovery.
Think Progress insists that there are no reasons for the President Obama and the Congress to impose contractionary policies. The website quotes economists at the American Enterprise Institute: "An abrupt spending sequestration... could cause a US recession, coming as it does on top of tax increases worth about 1.5 per cent of GDP enacted in January."
The opinion among leading liberal economists is that contractionary policies will stymy efforts to bring the economy to full employment, that is, an unemployment level of about 5 percent. Think Progress reports that according to the forecasting firm Macroeconomic Advisers, uncertainty over fiscal policy and debt ceiling brinkmanship has contributed to the shrinking of the economy. Economic growth rate shrank by 0.1 percent in the last quarter of 2012. Contractionary fiscal policy about to be implemented in March could lead to further dip in economic growth rate leading to a profound economic recession.
American Progress points to the US economy's demonstration of resilience by adding 155,000 jobs, according to new figures released by the U.S. Bureau of Labor Statistics (PDF). The performance of the private sector in particular is held up as evidence of progress in recovery from economic crisis. However, analysts worry about the negative impact of losses in government job positions. According to The Huffington Post, employment figures for January show that government lost 9,000 positions.
Analysts are saying that the job losses will have a ripple effect throughout the US economy. An economist Dean Baker, co-director of the Center for Economic and Policy Research told The Hufffington Post: "If these people were still getting paychecks, they would have spent them, and that would have employed people elsewhere in the economy."
Baker estimated that the government job cuts have cost the economy more than 1 million jobs total.
According to the Bureau of Labor Statistics (BLS), the government has cut 719,000 jobs since President Obama took office. Many economic analysts say government job losses are having a negative impact on the economy because government is the major employer and that spending by government employees through the multiplier effect stimulates the economy by providing income and jobs for others.
Baker argued that the government should not at the moment be focusing on deficit reduction but on how to put people back to work. He said: "No one is talking about how we shouldn't be cutting the deficit; we really need more jobs and that means larger deficits. No one prominent in the debate is saying that."
According to The Huffington Post, economic recession that could have global ripple impact looms as government begins implementing deep cuts in spending on March 1.
Pundits maintain that while the economy is strong enough to withstand moderate levels of austerity, any major additional austerity measures (sequestration), or even a prolonged debate on whether to allow the sequestration go into effect could plunge the economy into recession.
Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, and former Obama administration economic adviser, said that letting the sequestration go into effect would send the unemployment rate up to 8.2 percent.
He said: "While the government's fiscal policy was adding to growth back in 2009 and 2010, at this point it's subtracting from growth. If state and local employment had held up instead of falling so quickly, the unemployment rate would easily be a point lower than it is today [6.9 percent]."
American Progress notes that austerity has plunged Great Britain and much of Europe into a deep recession, with unemployment rising steeply. A similar move in the US in 2013 could lead to a deeper recession in the US than in Europe.
American Progress opines:
At a minimum, Congress needs to refrain from additional short-term budget cuts. Far better would be to pass legislation that provides additional near-term job creation measures—such as needed investments in infrastructure and a large-scale mortgage-refinancing program—and make cuts several years in the future when the economy is in a stronger position, as President Obama pushed for as part of a grand bargain in the fiscal negotiations in December.
As today’s jobs report makes clear, the country is moving forward and creating jobs. Now is not the time for additional austerity, however, as the economy is in no shape for such a beating.
But with the US Congress pushing for sequestration scheduled to take effect in March, which will require deep spending cuts, it looks like the die is cast and that a recession is inevitable.
Adam Hersh, an economist at the Center for American Progress, said: "Today's GDP numbers show the toll that political conflict over fiscal policy is taking on U.S. economic growth. The 0.1 percent economic contraction puts the United States on the precipice of recession. Our economy would certainly have grown at a faster rate last quarter, were it not for political brinkmanship over the debt ceiling and the risk of sharp fiscal contraction in the form of automatic 'sequestration' budget cuts. That contraction is now unfolding."
Meanwhile, warnings about the dangers of austerity continue to grow. Stone said: "This is a warning about the sequester."
Borosage concluded: "As Europe has shown and the IMF has warned, inflicting austerity on a weak economy is ruinous and is likely to drive us back into a recession. Those dismissing the downturn as due to an odd drop in government spending should consider that more of these are on the docket."
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