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2011 Budget Compromise Threatens Recovery, Doesn't Address Real Causes of Deficit

By       Message Evan Geraniotis     Permalink
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The recent budget compromise averted the government shutdown but doesn't accomplish much else. It threatens to derail the frail economic recovery, while its spending cuts make hardly a dent on the deficit.  It is based on the wrong premise that spending cuts alone will solve our deficit and debt problems. 

What Contributed to Recent Deficit and Debt Accumulation

To understand the false premise of the debate and political fights over budget deficits and debt we must first review the actions and events that led to our current  predicament . All figures used below come from Departments of Treasury and Labor and Congressional Budget Office. When President Clinton left office in Jan 2001 he bequeathed to President G.W. Bush a budget surplus of $260 billion a year, a national debt of $5.7 trillion, and a booming economy that had created 22 million new jobs. Bush in his 8 years did not pay for two wars, two tax cuts, and extending Medicare (Part D); this added $5.5 trillion to the debt, effectively doubling it. In late 2008 the Wall St meltdown caused a global financial crisis resulting in a deep recession.  By Dec 2008 the economy was shedding 750,000 jobs a month.  In Jan 2009 Bush bequeathed to President Obama a debt of $11.2 trillion, a deficit of $1.2 trillion, and a recession that by summer 2009 had shed 8 million jobs.

In 2009-2010 Obama and the Democrats stabilized the economy, averted the pain of another great depression, and put us on path of firm but slow recovery.  By March 2011, 1.8 million jobs were added by the private sector, while over $2 million jobs were saved by the 2009-10 Stimulus. But the great recession and government's response to it came at a high cost. Lower tax receipts due to recession took $1.5 trillion out of  government revenue, TARP cost $70 billion (out of $700 billion initially allocated, rest was paid back), and Stimulus cost $900 billion ($300 billion of which in additional tax cuts for individuals and corporations). Funding of the two wars continued, as did Medicare Part D and the Bush tax cuts. By the end of 2010 another $3 trillion had been added to the debt and the deficit reached $1.5 trillion a year.

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Moreover, in Dec 2010, the new Congress reached a Tax-Cut compromise which extended the Bush tax cuts (till the Dec 2012), provided tax credits for corporations and a deduction in payroll taxes, it also extended jobless benefits and the earned income, child and college tax credits (all these till Dec 2011).  In essence it enacted a second Stimulus for 2011-12 with cost $900 billion in lost tax revenues so as to ensure a continuing recovery. This together with continued funding for the two wars, Medicare Part D and other government expenditures are projected to add $3 trillion more to the debt by end of 2012..

Rival 2011 Budget Proposals and Final Compromise

Then came the budget proposals for 2011. Obama's proposal cut $40 billion from the 2011 baseline budget and froze federal worker pay and discretionary spending. It included a mix of spending cuts -- mostly in programs that had expanded in 2009-10 under the Stimulus to help cope with the recession -- and pro-growth investments in education, innovation and infrastructure.  By contrast the GOP proposal of $61 billion in cuts -- on top of the $40 billion in cuts offered by Obama -- focused only on non-security discretionary spending (being just 12% of the budget) and called for across-the-board cuts that will curtail several programs for the poor and adversely affect most government agencies and services offered to the public. My Daily Kos article of March 16 "Rival Fiscal Agendas Threaten Government Shutdown" (link: click here) provides a detailed comparison of these proposals. 

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The ensuing intense political fight repeatedly threatened a government shutdown -- during which GOP, under pressure from its Tea Party backers, threatened to cripple or eliminate funding for Planned Parenthood, EPA, NPR, and PBS.  At the last hour a compromise was reached on $38.5 billion in cuts, which added to the President's aforementioned cuts for a total of $78.5 billion, the largest cuts ever approved for a year-to-year federal budget. These cuts pose a most serious threat to derailing the frail economic recovery for the  reasons provided below.

For more detail on the budget fight and its false premise refer to my Daily Kos article of April 8 (before the Compromise was struck) "The False Premise of the 2011 Budget Battle and Government Shutdown" (link: click here).

The Threat to Economic Recovery

Though the private sector has added so far 700,000 jobs in 2011 (out of 1.8 million since 2010), 200,000 in March alone lowering the unemployment to 8.8%, the States due to budget shortfalls have lost over 60,000 jobs in 2011, 20,000 of them in March alone, and over 400,000 since the recession started. The $300 billion assistance to the States (part of 2009 Stimulus) expired in Dec 2010 and States are expected to enact $110 billion in spending cuts in 2011 alone, resulting easily to an additional 150,000 state jobs lost. There are still 13 million people unemployed and 5 people looking for each new job. If the economy only adds 200,000 jobs a month it will take till 2016 to bring the unemployment rate down to 6%.
 
According to Goldman Sachs and Moody's -- Wall St' s top investment and rating firms, respectively -- the spending cuts enacted by the recent compromise are expected to shed 400,000 jobs in 2011 alone, and similar or deeper cuts will cause in 2012 another 600,000 jobs lost. Moreover, the truly stimulative parts of the 2010 Tax Compromise expire in Dec 2011, while only the pure tax cuts continue to Dec 2012.  Also the Federal Reserve will complete its Quantitative Easing (printing money to buy our own debt) in June 2011 and may start tightening its monetary policy which will contract the economy. 

And we should not forget the rising oil prices due to global demand and unrest in Middle East, the continuing credit crisis in Europe, and the tsunami and near nuclear disaster in Japan, that may slow the economies of several countries. Moreover, the housing market remains weak, foreclosures are increasing cause banks prefer them to loan modifications in many cases, credit remains tight, wages remain stagnant and are suppressed further due to increased competition from laid-off educated state workers, while increased college education and health care costs continue to burden family budgets and weaken their buying power, which results in anemic consumer demand.  Finally, lack of enforcement of trade agreements, increased global competition from fast growing countries, and corporate tax loopholes that enable the off-shoring of jobs contribute to many corporations not investing in plants and jobs on American soil. 

For additional detail on the threat to economic recovery posed by the spending cuts of the Budget Compromise refer to my Daily Kos article of April 4 "Is the Risk of a Budget Compromise Acceptable to Democrats ? -- Part I: Threat to Economic Recovery" (link: click here).

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Short-Term vs Long-Term Deficits

On the other hand, the compromise spending cuts of $38.5 billion (or $78.5 billion from the 2011 baseline) represent only 2.6% (or 5.2%) of the $1.5 trillion deficit for 2011 and just 0.27% (or 0.54%) of our national debt of $14.2 trillion; it hardly makes a dent on the deficit or the debt. However, we should distinguish between the $5.7 trillion in debt that was accumulated over 220 years of the Republic till the end of 2000 and the $8.5 trillion accumulated between 2001 and 2010, that is $5.5 trillion under Bush and $3 trillion so far under Obama. The debt incurred since 2001 as detailed above is due to (i) unfunded wars, the Bush tax cuts, and Medicare Part D, (ii) lost revenue due to the great recession, and (iii) the government's response to avert a great depression and jump-start the economic recovery. 

Similarly, budget deficits have a short-term component due to the programs that contributed to the debt accumulation since 2001,and a long-term component due to the projected growth of Medicare, Medicaid and, to a lesser extent, Social Security. The latter will become increasingly more dominant as we are progressing towards 2020 and beyond.  It is the result of "baby boomers" having paid less in taxes that they draw in benefits. Promises have been made that can not be kept. This presents a serious threat to the long term solvency of these popular social safety net programs.  

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EVAN GERANIOTIS holds Master of Science and Doctoral degrees in Electrical Engineering from the University of Illinois in Urbana-Champaign and Bachelor's and Master's degrees from Polytechnic School of Athens, Greece. He served as a Professor of (more...)
 

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