FacebookTwitterGoogle+RedditEmail

Premature Austerity

by ANDREW FIELDHOUSE

My colleague Josh Bivens outlined the contours of this weekend’s 11th hour budget deal, concluding that Congress mostly monkeyed around with upper-income taxes—a politically contentious “fiscal cliff” component, but the least economically significant—leaving large swathes of scheduled fiscal restraint in place (or merely delayed a few months). For months, Josh and I have been arguing that the only real challenge facing Congress is the reality that the budget deficit closing too quickly—as it has been since mid–2010—threatens to push the economy into an austerity-induced recession. To this effect, “cliff” was a doubly misleading metaphor, as there was no single economic tipping point (underscored by President Obama signing the deal on Jan. 2, after the misguidedly hyped Jan. 1 “cliff plunge” had passed) and the legislated fiscal restraint was comprised of fully separable policies rather than an all-or-nothing dichotomy.

Viewed through the proper lens of avoiding premature austerity instead of compromising over tax policy for the top 2 percent of earners, Congress predictably failed to adequately moderate the pace of deficit reduction; short of sharply reorienting fiscal policy to accommodate accelerated recovery, U.S. trend economic growth will continue decelerating into 2013—slowing to anemic growth insufficient to keep the labor market just treading water.1 Absent substantial (seemingly remote) additional spending on public investment and transfer payments, the labor market will almost certainly deteriorate this year, regardless of what happens with sequestration and the pending debt ceiling fight.

recently explained that the fiscal “cliff,” or rather, fiscal obstacle course debate was intrinsically fixated on maintaining anemic growth versus falling into a recession and deeper depression, notmoving toward full recovery. As a rough compass, policymakers need to target real GDP growthabove 2.2 percent (the Congressional Budget Office’s estimate of real potential economic growth over 2012–2022) if this depression is to eventually be ended. Trend economic growth for the first three quarters of 2012 registered only 2.1 percent annualized real GDP growth, which is below this benchmark, meaning that sustaining current economic performance would fail to make progress toward restoring full employment. And this budget deal—indeed expiration of the payroll tax cut alone—guarantees that current economic performance will not be sustained.

If all the major components of the fiscal obstacle course were “turned off,” (i.e., scheduled spending cuts repealed and tax increases prevented), we projected that real GDP would grow 3.1 percent in 2013. If, on the other hand, the current policy baseline were adhered to (in which the payroll tax cut and emergency unemployment benefits were assumed to expire and discretionary spending caps continue ratcheting down), we estimated the economy would decelerate to 1.4 percent real growth. And if the legislated fiscal contraction fully materialized (adhering to the current law baseline), CBO forecasted that real GDP would contract 0.5 percent in 2013.2 So how does the enacted deal stack up?

Problematically, the budget deal shrinks the projected budget deficit for 2013 relative to current policy, whereas the economic challenge at hand was moderating the pace of deficit reduction.The biggest economic drags in the fiscal obstacle course were the scheduled expiration of ad hoc fiscal stimulus and the Budget Control Act (BCA) of 2011, but these were only partially mitigated. What follows is an overview of major fiscal headwinds still pending for 2013:

* First and foremost, the expiration of the payroll tax cut is projected to reduce disposable income by $115 billion, shaving 0.9 percentage points from real GDP growth and lowering employment by nearly 1.1 million jobs relative to 2012 fiscal policy.

* The sequester was delayed for only two months, leaving a drag of 0.6 percentage points of real GDP if it materializes for the remainder of the year, or if the sequester is replaced with other spending cuts of a comparable magnitude (e.g., House Republicans voted to replace sequester cuts to the Department of Defense with deeper domestic cuts). This would mean a loss of 660,000 jobs relative to 2012 fiscal policy.

* The phase-one BCA discretionary spending caps will ratchet down, shaving 0.4 percentage points from real GDP growth and reducing employment by roughly 530,000 jobs relative to pre-BCA law.

* The Emergency Unemployment Compensation (EUC) program was extended, but only for a maximum duration of 73 weeks and to the cost of $30 billion in 2013, down from $39 billion in inflation-adjusted outlays for 2012 (when a maximum duration of 99 weeks was in effect for much of the year). Relative to 2012 fiscal policy, this implies a drag of 0.1 percentage points and 100,000 fewer jobs.

* The partial expiration of the upper-income Bush-era tax cuts (see Josh’s post) will shave less than 0.1 percentage points from real GDP growth and reduce employment by roughly 80,000 jobs, relative to 2012 fiscal policy.

* Downward revisions to discretionary spending caps and offsets paying for continuation of the Medicare “doc fix” would exert a slight additional drag.

Relative to fully mitigating the obstacle course components, these remaining drags imply 2.1 percentage points shaved off real GDP growth and more than 2.4 million fewer jobs in 2013. This suggests real GDP growth just above an anemic 1.0 percent for 2013. Relative to the 1.4 percent real growth we projected under current policy, the unaddressed bulk of pending sequestration cuts and the slight drag from partial expiration of the upper-income tax cuts exceeds the boost from continuing emergency unemployment benefits for up to 73 weeks. Even if the sequester is fully repealed without offsets—a best case policy scenario, but seemingly unlikely—real GDP growth of roughly 1.6 percent would be expected. Regardless, real growth rates anywhere in the range of 1.0 percent to 1.6 percent for the full year suggest deterioration in the already distressed labor market.

This debate was always about averting a recession in favor of maintaining anemic growth rates. That may have been accomplished by the budget deal, although much uncertainty surrounds sequestration and the statutory debt ceiling. But this bar for political horse-trading was always set appallingly low. The United States is still mired in a severe jobs crisis, and it’s a safe bet this jobs crisis intensifies in 2013 because of premature budget austerity and policymakers’ abdication of promoting full employment.

Andrew Fieldhouse is a federal budget policy analyst at the Economic Policy Institute, where this article originally appeared.

February 09, 2016
Andrew Levine
Hillary Says the Darndest Things
Paul Street
Kill King Capital
Ben Burgis
Lesser Evil Voting and Hillary Clinton’s War on the Poor
Paul Craig Roberts
Are the Payroll Jobs Reports Merely Propaganda Statements?
Fran Quigley
How Corporations Killed Medicine
Ted Rall
How Bernie Can Pay for His Agenda: Slash the Military
Neve Gordon
Israeli Labor Party Adopts the Apartheid Mantra
Kristin Kolb
The Greatest Bear Rainforest Agreement? A Love Affair, Deferred
Joseph Natoli
Politics and Techno-Consciousness
Hrishikesh Joshi
Selective Attention to Diversity: the Case of Cruz and Rubio
Stavros Mavroudeas
Why Syriza is Sinking in Greece
David Macaray
Attention Peyton Manning: Leave Football and Concentrate on Pizza
Arvin Paranjpe
Opening Your Heart
Kathleen Wallace
Boys, Hell, and the Politics of Vagina Voting
Brian Foley
Interview With a Bernie Broad: We Need to Start Focusing on Positions and Stop Relying on Sexism
February 08, 2016
Paul Craig Roberts – Michael Hudson
Privatization: the Atlanticist Tactic to Attack Russia
Mumia Abu-Jamal
Water War Against the Poor: Flint and the Crimes of Capital
John V. Walsh
Did Hillary’s Machine Rig Iowa? The Highly Improbable Iowa Coin Tosses
Vincent Emanuele
The Curse and Failure of Identity Politics
Eliza A. Webb
Hillary Clinton’s Populist Charade
Uri Avnery
Optimism of the Will
Roy Eidelson Trudy Bond, Stephen Soldz, Steven Reisner, Jean Maria Arrigo, Brad Olson, and Bryant Welch
Preserve Do-No-Harm for Military Psychologists: Coalition Responds to Department of Defense Letter to the APA
Patrick Cockburn
Oil Prices and ISIS Ruin Kurdish Dreams of Riches
Binoy Kampmark
Julian Assange, the UN and Meanings of Arbitrary Detention
Shamus Cooke
The Labor Movement’s Pearl Harbor Moment
W. T. Whitney
Cuba, War and Ana Belen Montes
Jim Goodman
Congress Must Kill the Trans Pacific Partnership
Peter White
Meeting John Ross
Colin Todhunter
Organic Agriculture, Capitalism and the Parallel World of the Pro-GMO Evangelist
Ralph Nader
They’re Just Not Answering!
Cesar Chelala
Beware of the Harm on Eyes Digital Devices Can Cause
Weekend Edition
February 5-7, 2016
Jeffrey St. Clair
When Chivalry Fails: St. Bernard and the Machine
Leonard Peltier
My 40 Years in Prison
John Pilger
Freeing Julian Assange: the Final Chapter
Garry Leech
Terrifying Ted and His Ultra-Conservative Vision for America
Andrew Levine
Smash Clintonism: Why Democrats, Not Republicans, are the Problem
William Blum
Is Bernie Sanders a “Socialist”?
Daniel Raventós - Julie Wark
We Can’t Afford These Billionaires
Enrique C. Ochoa
Super Bowl 50: American Inequality on Display
Jonathan Cook
The Liberal Hounding of Julian Assange: From Alex Gibney to The Guardian
George Wuerthner
How the Bundy Gang Won
Mike Whitney
Peace Talks “Paused” After Putin’s Triumph in Aleppo 
Ted Rall
Hillary Clinton: the Good, the Bad and the Ugly
Gary Leupp
Is a “Socialist” Really Unelectable? The Potential Significance of the Sanders Campaign
Vijay Prashad
The Fault Line of Race in America
FacebookTwitterGoogle+RedditEmail