c.2013 New York Times News Service
c.2013 New York Times News Service
The Grand Bargain is off the table. Thank goodness for that.
Even before representatives of the Democratic-controlled Senate and the Republican-run House sat down to their first official budget reconciliation meeting Wednesday, it was hard to find anybody in Washington who believed a deal could be reached to bridge the chasm between the two parties’ tax and spending plans.
Republicans might be chastened, their popularity at rock bottom. But they seem as unwilling as ever to retreat from their position that the budget deficit must be reined in via spending cuts alone. Both the White House and Senate Democrats, meanwhile, remain adamant that new tax revenues should play a part in closing the gap.
A modest bargain might be within reach to undo a small slice of the indiscriminate spending cuts that befell the discretionary budgets for military programs and domestic agencies, which are on schedule to scale back government spending by about $1 trillion over a decade. This could be paid for over the long term by, say, raising Medicare premiums for high-income Americans. But that is about the best Congress can probably do.
There is a risk that such a deal would not hold for long, opening the door for a return of the politically motivated crises that have been battering the economy every few months.
But the modest objectives carry a silver lining: Taking a timeout from the inside-the-Beltway obsession with gouging government programs to rein in the nation’s budget deficit could save the economy from a lot of harm.
Let’s stipulate that the current deficit is big and the accumulation of debt, if left unimpeded, imposes a future threat to the economy. But the assumption that the nation’s biggest problem today is too much borrowing is flawed.
For one thing, it ignores the large-scale budget cutting already in place. And it plays down the costs of steep deficit reduction in an economy that remains far short of its potential. If anything, the bigger problem is the exact opposite: Severe budget cutting is shrinking the federal government too much for it to do its necessary jobs.
Budget cutters are walking tall around the world. In Germany, the finance minister, Wolfgang Schäuble — chief enforcer of austerity along the eurozone’s periphery — argued that “the world should rejoice” at Europe’s belt-tightening. In Britain, the government of Prime Minister David Cameron has welcomed the economy’s incipient turnaround as vindication of an austerity strategy now in its fourth year. An editorial in The Financial Times declared that George Osborne, the chancellor of the Exchequer, “won the political argument.”
But few countries can match the speed with which the United States has embraced fiscal austerity. In 2013, the federal deficit shrank at its fastest pace in more than four decades, dropping to 3.9 percent of the nation’s gross domestic product, from 6.8 percent the year before, according to the Congressional Budget Office.
According to the International Monetary Fund, the general government deficit of the United States, which includes states and municipalities, will fall by about two-thirds as a share of GDP from 2009 to 2014. Most of the decline will come from reductions in spending.
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Not even Britain has trimmed its budget as steeply. Only Greece, Ireland and Portugal — cornered into austerity by creditors in Berlin and in Brussels demanding a cleanup from past excesses — have shrunk government spending more sharply.
Yet for all the cuts already in the bag, calls in Washington for further retrenchment remain strong.
“None of us can be proud of the way we spend the money,” said Tom Coburn, R-Okla., the other day from the Senate floor.
Such fiscal virtue comes at a cost. Considering the depth of the cuts, it is remarkable that the U.S. economy did not fall off a cliff.
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In a sign that the United States is still much more resilient than most other advanced nations, its $16 trillion economy has managed to trundle along, overcoming austerity, the government shutdown and a brief flirtation with default. If IMF forecasts hold, the U.S. economy will grow by roughly 1.6 percent this year and add about 1.5 million jobs, significantly better than Europe and Japan.
But that hardly means no harm was done. A recent analysis by the research firm Macroeconomic Advisers estimated that cuts to discretionary government spending — roughly everything the government spends money on except for Social Security and Medicare — trimmed growth by seven-tenths of a percentage point a year since 2010, and cost some 1.2 million jobs.
The costs are mounting across the Atlantic, too, despite the contentment in London and Berlin. A study by an economist from the European Commission published this month concluded that spending cuts put in place by governments from Greece to Germany since 2011 had stalled the economic turnaround of the entire euro area.
A host of economic analyses over the past three years by researchers from different corners of the world — including Roberto Perotti at Milan’s Bocconi University, Alan Taylor and Òscar Jordá at the University of California, Davis, and researchers at the IMF — have concluded almost invariably that budget cutting in a depressed economy is counterproductive.
By cutting teachers or raising taxes, reducing government transfers or trimming public purchases of goods and services, austerity shrinks the economy in the short term, often more than it shrinks the burden of public debt.
When interest rates are at or near zero — as they are today in much of the developed world — there is little central bankers like Ben S. Bernanke and Mario Draghi can do to compensate for the declining business.
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As Lawrence H. Summers, the former Treasury secretary under Bill Clinton and architect of President Barack Obama’s initial economic program, pointed out in congressional testimony last May, the sequestration’s $64 billion in cuts this year might reduce federal debt by 0.39 percent of GDP. But if the GDP shrinks by 0.6 percent, as estimated by the Congressional Budget Office, it will make the debt burden heavier, not lighter.
Here’s how Simon Wren-Lewis, a professor of economics at Oxford University put it: Arguing that the tiny amount of economic growth Britain has recently achieved after a years-long downturn proved austerity to be the right policy is tantamount to saying that global warming skeptics had “won the climate change argument because of recent heavy snow.”
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The United States does face a fiscal challenge. The CBO predicts that along the current policy path, public debt will start rising as a share of GDP toward the end of the decade and exceed 100 percent of the size of the economy in about 25 years.
There is time to fix that, gradually, especially as long as interest rates remain low.
But if current tax and spending policies remain in place, the civilian government’s entire discretionary budget — which pays for things like worker training, research at the National Institutes of Health, border security and much more — will shrink by 2023 to just 2.6 percent of GDP, the equivalent of about $420 billion in today’s economy. That’s less than at any point in decades.
This is the money that helps pay for child care and education; that maintains our roads and bridges; funds the National Parks. Its decline deserves the American political system’s undivided attention. Fat chance.
There was a time when the White House and Congress could hammer out a deal to broadly increase spending on the kind of short-term investments prosperity depends on and pay for it gradually over time — judiciously raising taxes and sensitively adjusting the entitlements expected to swell as the population ages in decades to come.
Not today, though. In the present, the least damaging path may be to postpone the big decisions and sweat the small stuff instead.