US Budget Deal: The Good, Bad and Stupid

It's encouraging we have a budget, but the economic ignorance continues in Washington, especially among Republicans

There was good news, bad news, and stupid news from the budget deal reached by the US House of Representatives this week. Probably the best news is that we can have a national day of gloating that there are no cuts to social security. "Grand Bargains" of the sort that would include such cuts seem to be off the table for now, thanks to a lot of grass-roots opposition. This is good news because most senior citizens get most of their income from Social Security. At an average benefit of $1,300 a month, cuts aren't wise. In fact, Senator Elizabeth Warren - a potential Democratic presidential contender for 2016 - has proposed increasing benefits, and that makes a lot more sense.

Most of the baby boomers that will retire over the next two decades have very little savings for their retirement, with many having lost a lot of it when the housing bubble burst in 2006-07. The whole idea that Social Security has any serious financial problems to begin with is an urban legend that has duped millions for decades, including (sadly) many journalists. It's long past time to retire that nonsense.

The lesser good news is that some of the automatic or "sequestration" cuts in non-military (why does anyone use the euphemism "defense"?) spending for fiscal years 2014 and 2015 have been reduced. This should add about 250,000 jobs next year. Unfortunately, the gains from this are about cancelled out by the decision to cut off federal Emergency Unemployment Compensation for 1.3 million workers just after Christmas, since the loss of this spending will reduce growth and employment by about an equivalent amount. (Another 3.5 million are expected to lose benefits during 2014). This is especially mean to the long-term unemployed, since long-term unemployment is currently at twice or more than the level at which federal benefits have been eliminated in any of the previous recessions since 1959. America is a much richer nation today, but not kinder or gentler to the unemployed.

We won't know until further legislation is passed exactly how the approximately $31bn in non-military, discretionary spending that has been restored by this budget will be distributed. So we don't yet know, for example, whether the 57,000 children cut off from the Head Start pre-school programs last year will get a reprieve.

More bad news: no tax loopholes will be closed. Mega-rich hedge fund managers will still have income taxed at rates lower than teachers. Billionaires will still be able to avoid paying most estate taxes. And as for corporate welfare payments, the $20bn that was scheduled to be cut from the military will be restored. Can anyone tell us why our bloated military needs that $20bn? The sequester cuts would have brought Pentagon spending back to the level of 2007 - still more in inflation adjusted terms than it was at the height of the Vietnam War.

As my colleague Dean Baker has pointed out, if we look at the planned spending cuts over the next decade, we need to take inflation and GDP growth into account, for non-military discretionary spending. In other words, our actual defense needs don't increase with the size of our economy, but other discretionary spending - eg research, education, infrastructure, housing - normally would. So the planned budget over the next 10 years would cut real spending in the affected areas by more than 50% as a share of the economy, as if the United States were becoming a relatively much poorer nation.

Which brings us to the stupid news: while many are breathing a sigh of relief that the Republicans learned their lesson from the October shutdown and we will be spared further painful drama, the whole narrative of having to reduce federal spending is still stupid. Even the reigning champion of budget cutters, the International Monetary Fund (see Figure 6 here) has demonstrated the destructive impact that fiscal tightening has had in Europe. It is the main reason that Europe has more than 12% unemployment and the US has 7% (which is nothing to brag about).

America doesn't have a federal public debt problem: net interest payments on the U.S. public debt are currently about 1% of GDP. This is about as low as it has been in the post-World-War II period, and is very small by any measure. The fact that our government is still trying to reduce economic growth and employment while we have more than 20 million people unemployed or underemployed is testimony to the unbridled power of the special interests that dominate debate over economic policy in the United States.

It's encouraging that we have some sort of budget, but the economic ignorance continues in Congress.

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