(C) Daily Kos
This story was originally published by Daily Kos and is unaltered.
. . . . . . . . . .



Result of taking $1 Trillion out of the US Federal budget [1]

['This Content Is Not Subject To Review Daily Kos Staff Prior To Publication.']

Date: 2025-02-16

United States gross domestic product for year 2024 was 29 trillion dollars. See page 9 here. Real GDP increased 2.8 percent in 2024 (from the 2023 annual level to the 2024 annual level), compared with an increase of 2.9 percent in 2023. This amounts to about $800 billion dollars.

Multiplier effect on federal spending - dollars injected into local economies by the federal government result in additional spending. According to this reference that multiplier is 1.64

According to this reference that multiplier is in the neighborhood of one. See table 2. According to table 4 the result depends upon whether the economy is in expansion or contraction. The multiplier on additional government spending being less than one in the state of expansion and greater than one in the state of contraction. In this case we are interested in the result of decreased government spending when the economy is in the state of expansion.

The size of the multiplier also depends upon interest rates. At zero interest in the size of the multiplier as much larger than otherwise. See Table 5. Also

Permanent fiscal measures tend to have more persistent output effects than temporary ones... models clearly differentiate between temporary and permanent fiscal measures... In these models, the effect of the temporary fiscal measure does not generally last beyond the duration of the shock itself, because forward-looking agents are not affected by temporary changes in their disposable income, while credit-constrained ones are only affected over the duration of the shock. For instance, Coenen and others (2012) show that GDP returns to its baseline level after two years in the case of a two-year temporary increase in government consumption. By contrast, the effect of a permanent fiscal shock may be more persistent

So the size of the multiplier effect is dependent upon state of the economy, interest rates, and the duration of the spending change.

Also to be considered as the effect of tax cuts on consumption by the wealthy. This effect is likely to be rather small since the wealthy are already able to consume as much as they want.

In any event, a 1 trillion dollar reduction in federal spending is comparable to the recent economic growth of the US, and would lead to a flat economy. A two trillion dollar reduction in federal spending would almost certainly lead to economic contraction, which is to say, recession. There are additional effects to be considered as a result of the loss of crucial Federal services, namely emergency response to natural disasters, and loss of Federal response to epidemics. These losses will have a negative impact that is difficult to calculate.

Credit to elenacarlena:

elenacarlena Feb 16, 2025 at 10:53:18 AM Here’s an AP report, apnews.com/… “The economic outlook worsens” is kinda buried in their report, but it’s there. They still don’t talk a lot about the loss of all those government workers. But inflation rose, $Rump blamed Biden, but for how long will he get to use that pass? It’s actually not even been one month since $Rump took office, although it already seems like years! According to the AP, the February numbers will be important. I think everyone assumes that if the economy starts to tank, $Rump or his minions will realize they have to stop, go slower, make a course correction, whatever it takes. Maybe his current allies in Congress will even start to realize they had better do something! Most hopeful to me is this: More trouble signs came when the Commerce Department reported that retail sales slumped 0.9% on a monthly basis in January. A drop that large could signal a weakening in consumer confidence and economic growth. Of course it does! We talk boycott, but less buying will happen naturally when people don’t know if their paychecks will continue. Not only government workers, but all retirees. I’m certainly holding onto my SS paycheck that I received last week, just buying necessary groceries because I don’t know if I’ll get my paycheck next time. The AP reports that production is also down, so if you work in an industry that can be affected, you’ll feel the same uncertainty over the safety of your paycheck and pull back on spending….[emphasis added]

See also:

“Where’s my desk?” Federal workers ordered back to offices with no space, internet, or parking

Beware the Ides of March (Excrement to Meet the Fan)

Additional analysis welcome.

[END]
---
[1] Url: https://dailykos.com/stories/2025/2/16/2304166/-Result-of-taking-1-Trillion-out-of-the-US-Federal-budget?pm_campaign=front_page&pm_source=more_community&pm_medium=web

Published and (C) by Daily Kos
Content appears here under this condition or license: Site content may be used for any purpose without permission unless otherwise specified.

via Magical.Fish Gopher News Feeds:
gopher://magical.fish/1/feeds/news/dailykos/

You are viewing proxied material from magical.fish. The copyright of proxied material belongs to its original authors. Any comments or complaints in relation to proxied material should be directed to the original authors of the content concerned. Please see the disclaimer for more details.