Federal spending cuts deserve the most attention. They are the most likely of these issues to occur, and could have the largest magnitude. The assumption we incorporated into our recently revised budget estimates—discretionary spending cuts of $25bn and $50bn below the CBO baseline for FY2011 and FY2012 respectively—would shave nearly one percentage point off of the annualized rate of real GDP growth in Q2, but would fade quickly with a negligible effect on growth by year-end.If Phillips was right, we may be at the nadir now. And none too soon, with Obama's approval rating hitting an all-time low of 40% today.
As for Phillips' estimate of the 2011 budget war outcome: by most accounts, there was much less to the alleged cuts of $39 billion in 2011 discretionary spending than met the eye. Now, though, more cuts are coming, and there will doubtless be another pitched battle over the 2012 budget, with Republicans straining every nerve to suck air out of the recovery (does anyone seriously believe they don't want the economy to tank?) by cutting as much Federal spending as quickly as possible. All the more reason to urge, with Adam Serwer and Jonathan Cohn, that Democrats do their utmost before August 2 to reinsert extensions of the payroll tax cut and unemployment benefits into the deficit reduction bill.