Will Deficit Reduction Trump Investments In Economic Recovery?

May 19, 2010

It seems that conservatives have scored a big win. They’ve got the federal deficit in the bull’s eye. The debt we’re supposedly leaving to our children has become the unimpeachable reason for curtailing, if not altogether ditching, further investments to cushion the impacts of this prolonged recession and jump-start growth in the labor market.

Consider that Congress still hasn’t extended the expanded unemployment benefits and COBRA subsidies created by the economic recovery act beyond early June.

Nor has it acted on the looming crises resulting from the shortfalls in state and local budgets. The House is scheduled to vote on an extension of the enhanced federal match for state Medicaid programs tomorrow, but the outcome is uncertain because Members are queasy about the cost. ThisĀ  is also the case with key provisions in Congressman George Miller’s Local Jobs for America bill.

The Center on Budget and Policy Priorities reports that at least 45 states and the District of Columbia have cut back spending in core areas like public health, elementary and secondary education and services for elderly and disabled people.

Virtually all these will cause further job losses–not only in the programs themselves, but in businesses that supply the programs with goods and services. Thirty states and the District have also instituted hiring freezes and/or layoffs in their own workforces.

All these and a host of other cuts will feed a vicious cycle. More unemployed people exerting pressures on the safety net, spending less and, of course, paying less in taxes. Perhaps, in fact, eligible for more in refundable tax credits than they pay into the states’ coffers. Retailers buying less from their suppliers, and all of them paying less in taxes too.

But, we’re told, the federal government has to address the rising deficit and related level of federal debt. No doubt about that. If we just keep on keepin’ on, spending will outpace revenues, even after the economy fully recovers.

So we’ll borrow more. The Congressional Budget Office says that the ratio of federal debt to the nation’s gross domestic product (the total value of all goods and services produced) will rise from somewhat below 60% during the coming decade to 79% by 2035. Looking ahead to 2050, CBPP projects a debt level in excess of 300% of GDP.

The consensus view is that sustained high levels of government borrowing drive up inflation and interest rates, making borrowing more expensive for individuals and businesses, as well as the government itself. And revenues that could otherwise be spent on domestic investments must be diverted to paying interest on the debt.

Economic growth slows. And ultimately, some say, investors will lose confidence and shift their funds out of investments based on the U.S. dollar. Today Greece. Tomorrow America.

But that tomorrow is a hypothetical long way off. Right now, we’ve got a jobs crisis and a lot of collateral damage. So it’s very disturbing to see concerns about the long-term, structural deficit override concerns about the here and now.

In February, Lawrence Mishel, president of the left-leaning Economic Policy Institute, and David Walker, CEO of the fiscally-conservative Peterson Foundation, co-authored an answer to the President’s quandary on the deficit. Address jobs now and the deficit later, they said.

CBPP seems to come from the same place. It recommends that Congress allow the 2001/3 tax cuts for high-income filers to expire and, in the short term, use the revenues generated to fund policies that will stimulate economic growth and job creation.

But any proposed tax increases, even those that would affect only the top 2% of the wealthiest households, stir up a maelstrom of opposition–as, in fact, has the President’s entire Fiscal Year 2011 budget, notwithstanding its selective freeze on discretionary domestic spending.

Perhaps the President’s new fiscal commission will come up with a balanced plan to control the long-term deficit. But the need for that shouldn’t be used to block spending needed now to keep the devastating impacts of this recession from getting worse.


900,000 Jobs At Risk and Easy To Save

December 16, 2009

I, for one, am underwhelmed by the President’s job growth plan. I’d hoped for something bigger, bolder and more targeted to reach low-income people and their communities.

Still, I understand there are political realities here. As New York Times columnist Paul Krugman says, the President probably can’t do much in the face of rock-solid Republican opposition, especially when centrist Democrats are nervous about the deficit–and its effects on their re-election prospects.

One thing the Democratic leadership could do is reframe the objective. Yes, we need to create new jobs. But we also urgently need to preserve jobs in jeopardy. Otherwise, those new jobs we’ve been promised will be offset by new cutbacks.

Cutbacks are a virtual certainty unless Congress delivers additional fiscal assistance to the states–and, through them, to local governments.

According to the Center on Budget and Policy Priorities, 35 states are already facing shortfalls in their current budgets–this despite the fact the budgets were balanced when enacted.

Two major elements of the economic stimulus package will partially fill the gaps–the temporary increase in the federal government’s match on state Medicaid costs, a.k.a. FMAP, and the state fiscal stabilization fund, a one-time infusion of federal funds for education and other key services. Yet we can expect further cuts in critical services–and with them, more job losses.

The Center for Economic and Policy Research reports that state and local governments have shed more than 110,000 jobs in the last two years. Add to these jobs lost by employees of contract service providers and vendors. All these job losses ripple through the economy, as people with drastically reduced or no income cut back on spending.

Looking ahead to Fiscal Year 2011, 32 states already face budget gaps they haven’t yet addressed. CBPP expects the total shortfall to be $180 billion–only $10 billion less than this fiscal year’s. The big difference is that states will have used up most of their stimulus funds for education and other services, and the extra FMAP assistance will end part-way through the year.

So states will make further spending cuts and/or raise taxes. CBPP says these could result in a loss of 900,000 jobs–and even deeper cutbacks in education, health care and programs for low-income elderly and disabled people.

Seems to me that extending FMAP aid and the fiscal stabilization funding is a no-brainer. The basic legislation is already on the books. The funding would avert at least some further fraying of our tattered safety net. And it would prime the economic pump, thus offsetting the spending.

Mark Zandi, Chief Economist at Moody’s Economy.com recently testified that every federal dollar spent on general aid to state governments translates into a $1.41 increase in the GDP. This is a much bigger bang for the buck than the tax cuts the President in talking about.

Extending aid to the states can’t wait until Congress comes back in late January. Governors are already developing their budgets for FY 2011. State legislatures will begin voting on them as early as March. If they don’t know they can count on additional federal relief, they’ll begin implementing cutbacks. Local governments will do the same.

There go 900,000 more workers on the unemployment rolls, drawing unemployment insurance, accessing other benefits, reducing their spending to the minimum.

What will happen to our fragile economic recovery then?


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