Elmendorf: Tax Hikes and Spending Cuts Both Hurt Economy

It’s getting totally lost in the politics of the debt limit vote, but CBO director Doug Elmendorf made the point appearing before the House Budget Committee today. He was answering a question from Rep. Lloyd Doggett, D-Tex.

Our analysis implies that cuts in government spending or increases in taxes during the next few years would by themselves reduce output in employment relative to what would otherwise happen. At the same time, credible reductions in future deficits would boost output in employment in the next few years, because they’d hold down interest rates and increase household confidence.

Got that? Both parties are demanding a debt deal that will, according to CBO, have a negative impact on employment. Only one of their priorities – the spending cuts – get any traction. The difference is that Democrats don’t pretend that tax increases will boost employment, whereas Republicans will tell anyone who ask that spending cuts will help create jobs.