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Political System Failure

Economic Sabotage

by ANDREW FIELDHOUSE

As “sequestration” spending cuts seem increasingly likely to take effect tomorrow, and the blame game escalates over responsibility for the fallout, some incorrect revisionist history as well as (silly) pox-on-both-houses punditry merit comment.

If sequestration takes effect, it will be because congressional Republicans put draconian spending cuts in play, and have subsequently refused to replace those cuts with more sensible deficit reduction. And should sequestration take effect, this would not be an isolated case of economic policy malpractice: Congressional Republicans have consistently hamstrung efforts that economists overwhelmingly agree would have meaningfully helped lower the unemployment rate and instead advanced policies projected to decelerate near-term growth.

My colleague Josh Bivens and I recently chronicled at length the numerous, varying ways Congressional Republicans have deliberately obstructed a stronger economic recovery over the past four years.1 This economic and budgetary obstructionism, in turn, has been a considerable factor explaining why U.S. economic growth has decelerated since mid-2010 and is currently far too slow to push the economy back to full health in the next few years, already more than five years after the start of the Great Recession.

What follows is a not-so-quick history of how we got to this week’s deadline.

The Budget Control Act (BCA) of 2011—which spawned the sequester—was forced into existence by congressional Republicans refusing to undertake the customarily pro forma increase in the nation’s statutory debt ceiling. Instead, they held the debt ceiling increase hostage to deep spending cuts—over and above the $500 billion in discretionary spending cuts they had already won by filibustering a Senate omnibus spending bill and threatening a government shutdown. The Washington Post has detailed at great length that this ransoming of the debt ceiling was premeditated rather than a spontaneous act of beltway dysfunction.

The GOP’s policy advancement of deep government spending cuts in the face of severe economic weakness threatens to slow economic activity so much that falling tax revenues and increased automatic safety net spending will translate into higher debt ratios than would have existed before the cuts. In short, such cuts are even fiscally, not just economically, counterproductive.

During the debt ceiling negotiations in the summer of 2011, the Obama administration regrettably acquiesced to the GOP’s demand that every dollar increase in the debt ceiling be matched dollar-for-dollar with spending cuts (a demand widely referred to as the “Boehner rule”). This “Boehner Rule” was codified in law with the 11th hour enactment of the BCA on Aug. 2 (the last day Treasury could avoid defaulting).

The BCA had two phases. The first phase was almost entirely comprised of discretionary spending cuts and caps, and was essentially accompanied with a $900 billion increase in the statutory debt ceiling (equal to policy savings plus reduced debt service). The default for the remaining $1.2 trillion increase in the debt ceiling—enough to prevent another showdown until after the presidential election—was $984 billion in automatic sequestration cuts (or $1.2 trillion in savings with interest).

This automatic enforcement mechanism was designed to force the Joint Select Committee on Deficit Reduction (JSC, better known as the “Super Committee,” another creation of the BCA) to compromise on more sensible methods of deficit reduction. The form of the cuts—across-the-board, evenly split between defense and non-exempt domestic spending—was meant to be anathema to both political parties. Other parts of their design were also intentionally poorly constructed; the reductions in budget authority were evenly split in nominal dollars across nine fiscal years, so that the cuts actually shrink as a share of the economy. This front-loading of cuts into today’s weak economy is particularly perverse, and means that agencies have less time to adjust to new, lower funding levels. Further, by demanding austerity that was entirely comprised of spending cuts, the BCA maximized the economic harm posed by sequestration per year (a dollar of government spending cuts currently inflicts four-to-seven times the damage of a dollar of revenue). Despite all this, the Super Committee failed because GOP members refused to agree to the inclusion of even a penny of revenue to improve deficit reduction’s economic, programmatic, and distributional effects.

But before one gets too deep into the weeds, one should realize that real blame for the sequester can be laid at the feet of the GOP House leadership, who used the unprecedented threat of default on the nation’s debt to force $2.1 trillion of spending cuts. Period. Now the spending cuts that they demanded are poised to do substantial harm to our already depressed economy.

Should sequestration take effect for the remainder of the year, we estimate it will slow growth by an additional 0.6 percentage points and reduce employment by 660,000 jobs in 2013. That’s down slightly from 0.9 percentage points and some from 0.7 percentage points from growth and roughly 830,000 job losses we were forecasting before the lame-duck deal’s two-month punt. Our estimates are largely in line with those from Moody’s Analytics and the Congressional Budget Office (CBO), among others.

Some pundits have proffered that the cuts will not prove as bad as hyped, in part because the remaining $85 billion reduction in budget authority (BA) for fiscal 2013 only translates to $42 billion in reduced outlays. (Outlays lag somewhat behind the authority to spend money, and outlays more directly affect economic activity—the impacts cited above are based on outlays.) But the projected outlay reduction jumps to $89 billion in fiscal 2014 because the two-month delay disappears and outlays fall because of reduced BA in both fiscal 2013 and fiscal 2014. We project the economic drag from sequestration rises to 0.8 percentage points from real GDP growth and 910,000 job losses in calendar year 2014. In short, “good news” in the form of outlays lagging authority in 2013 just means worse news for next year.

It’s worth noting that these mounting drags would reinforce a marked trend deceleration in economic growth since mid-2010, which has already been exacerbated by the first phase of the BCA: We estimated that the BCA discretionary spending caps would shave 0.3 percentage points from real GDP growth in 2012 and further ratcheting down of the caps would reduce real GDP growth by 0.4 percentage points in 2013, relative to pre-BCA law. All told, the BCA accounted for roughly one-third of the fiscal drag for 2013 posed by the “fiscal cliff” ahead of the lame duck deal. And as underscored by the looming sequestration cuts, the lame-duck deal didn’t resolve the fundamental “fiscal cliff” challenge, which was overly rapid deficit reduction.

Perhaps most perversely, sequestration taking effect would actually increase the public debt-to-GDP ratio (the most commonly used metric of fiscal health). CBO’s February 2013 baseline—which assumes sequestration takes effect—projects public debt at $12.229 trillion by the end of fiscal 2013, for a 76.3 percent debt-to-GDP ratio relative to a $16.034 trillion economy. Assuming a fiscal multiplier of 1.4, meaning a dollar of government spending generates $1.4 in economic activity (and which is robust to a range of best estimates), repealing the BCA’s $42 billion reduction in fiscal 2013 outlays would increase GDP by $58 billion. And for every dollar the U.S. economy moves back toward potential output, the cyclical budget deficit shrinks by $0.37 (as tax receipts rise and spending on automatic stabilizers falls). Thus repealing $42 billion sticker price of sequestration would claw back $22 billion from the cyclical deficit, for an effective cost of $20 billion. And on net, adding $20 billion to public debt while boosting GDP by $58 billion would lower the debt-to-GDP ratio from 76.3 percent to 76.1 percent.

Beyond impeding near-term recovery and worsening the fiscal outlook, sequestration and the BCA at large threaten long-term growth in two ways. By delaying the return to full employment, the BCA will leave more productive resources to atrophy, exacerbating exceptionally inefficient economic scarring that is already lowering estimates of the U.S. economy’s long-run potential (see Bivens, Fieldhouse, and Shierholz 2013). And because the relatively small non-security discretionary budget—which is half comprised of public investment, totaling 90 percent of nondefense public investment—took the brunt of spending cuts, the legislation is starving the U.S. economy of a key driver of long-run growth.

When the BCA was enacted, my colleague Ethan Pollack and I coauthored a report “Debt ceiling deal threatens deep job losses and lower long-run economic growth” which highlighted the above mentioned economic risks posed by premature austerity and defunding public investment. As pending sequestration spending cuts loom increasingly likely, our analysis from 2011 remains fundamentally unchanged: No economic good could possibly come of the BCA’s discretionary spending caps and sequestration cuts.

Worse, U.S. policymakers are refusing to heed ample evidence since August 2011 cautioning against austerity: Premature austerity subsequently pushed the U.K. back into recession, and BCA discretionary caps have coincided with (and almost certainly contributed to) the trend of U.S. economic growth slowing so much that the economy is moving away from full recovery instead of even treading water. Diametrically opposed to this evidence-based policy analysis, some congressional Republicans have calculated that they should allow sequestration to occur because it maximizes the spending cuts they can extract and, relatedly, minimizes the revenue share of long-term deficit reduction. Wittingly or unwittingly, that corresponds with maximizing the economic sabotage Congress can inflict, short of, say, forcing a self-induced sovereign debt crisis. Their calculus is a damning indictment of our political system’s failure to uphold the social contract that had prevailed since the Great Depression that the federal government would target full employment and promote the general welfare of its citizens.

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

NOTES.

1. Specifically, they have objectively weakened the American Recovery and Reinvestment Act (ARRA), repeatedly filibustered routine extensions of emergency unemployment benefits, blocked aid to state governments, filibustered infrastructure investment, used extreme legislative vehicles like refusing to follow precedent on the typically pro forma votes to raise the debt ceiling to extract more economically damaging government spending cuts, blocked passage of a majority of the American Jobs Act (AJA), demanded counterproductive offsets to fiscal stimulus, and attacked the Federal Reserve’s expansion of the monetary base and other policy responses intended to lower unemployment.