The Senate and House resume negotiations over the President's and GOP's budget proposals and the raising of the debt ceiling, after the House passed a second stopgap extension and $10 billion in spending cuts so far. As these short-term fixes do not diminish the danger of a government shutdown, this post attempts to put the competing budget proposals and the rival political strategies in perspective. We first discuss the economic outlook, then describe the main elements and impact of the two Budget Proposals and end with our take on the Republican and Democratic strategies as a Government Shutdown becomes more likely.
The Economic Outlook
The economy shed 30,000 state government jobs in February alone, the private sector added 222,000 jobs in February. Since the Great Recession (2008-2009) State and Federal Government has shed 370,000 jobs while private sector has added 1.5 million jobs (source Dept of Labor). And the Stimulus created or saved at least 2.6 million jobs [sources: nonpartisan Congressional Budget Office, also Moody's (top Wall St Ratings Firm)].
The only reason that there were only 370,000 state jobs lost till now is that the 2009 Stimulus provided $300 billion assistance to the States in 2009-2010. Now that there is no Stimulus to help in 2011 and beyond the shedding of government jobs will continue unabated, it will not be surprising, if there are more than 400,000 such jobs shed in 2011 and 2012. The Federal Reserve's Quantitative Easing of $600 billion will cease by the end of June. The lack of Stimulus, assistance to the States, and Quantitative Easing combined with deep spending cuts in the 2011-2012 Federal Budget may seriously derail the frail economic recovery in US in the 3Q of 2011. Moreover, geopolitical events such as the uprising in Libya, the high oil prices, the tsunami in Japan with its nuclear catastrophe aftermath and the resulting damage to the third largest economy in the world, and austerity measures in several European countries may slow the global recovery. The original (consensus) estimate of 3.5% growth in US economy for 2011 may have to be revised downwards to possibly 2% or even lower. And the unemployment rate, currently at 8.8% may not come much below 8%.
GOP's Across-The-Board Spending Cuts
Republicans during their 2010 campaign arbitrarily pledged to cut $100 billion in discretionary spending from the level President Obama requested. This translates to about $60 billion for the rest of the fiscal year (till 9/30/2011). GOP dominated House promptly voted (235 to 189) for $61 billion in such cuts. But this is an arbitrary number that has little impact on budget deficit, while causing significant jobs losses and reducing essential government services.
It makes little sense to focus only on domestic discretionary, non-security spending, which accounts for less than 15% of the budget. Though discretionary spending should not be exempted from the cuts, cuts of the magnitude of GOP proposal are unwise when the economic recovery is still frail. These disruptions will be even more disruptive cause over1/3 of the fiscal year has already elapsed.
The Center on Budget and Policy Priorities calculates that the cuts correspond to 14% of non-security discretionary spending, which when spread over the remaining of fiscal year implies an average of 24% slashing. Moreover, the Economic Policy Institute estimates that $100 billion in such cuts (for whole fiscal year) may reduce GDP by 1.1% and cost 1.1 million jobs lost, derailing the recovery and possibly causing a double dip recession. A recent Goldman Sachs memorandum to their investors and a report by Moody's (the premier Wall St Ratings firm) estimate that GOP spending cuts will cause a drop between 0.7% and 2% in GDP (and between 700,000 and 2 million jobs shed) assuming total cuts ranging from $75 billion to $200 billion over the period 2011-2012.
The GOP cuts affect the delivery of essential services by the Government. State Dept's humanitarian aid budget will be cut by 41% impairing US outreach and image to the rest of the world. Food and Drug Administration (FDA), already underfunded, would be severely slashed jeopardizing our health safety. Securities and Exchange Commission, essential for effective regulation of Wall St and responsible for new important tasks under recent Financial Reform, instead of receiving more funds will be seriously underfunded. IRS enforcement budget is slashed undermining its ability to collect revenue. Funding for Environmental Protection Agency is cut by 30% preventing it from implementing new emission regulations and spending on new climate change programs. Transportation Dept's new projects on high-speed rail are eliminated. Housing programs seriously reduced. Dept of Energy's projects for clean energy, National Institute of Health, National Science Foundation, Center of Disease Control all see significant funding reductions impairing scientific research and future innovation. It also ends funding for Corporation for Public Broadcasting, National Endowment for Arts, National Endowment for Humanities. Moreover, it reduces funding to localities for hiring police officers, food assistance to low-income women and children, help to community centers and job training programs.
Obama's Cut-And-Invest Plan
The President in his State of The Union (SOTU) address called for pro-growth investments in education, innovation and infrastructure so as to to increase our global competitiveness and create jobs. At the same time he called for freezing discretionary spending and reforming our government so as to increase its efficiency and reduce fraud and waste. [For a discussion of Obama's pro-growth proposals during his January 26 SOTU address refer to "Pro-Growth Investments, Industrial Policies Key To Future" in Erie Times News of February 12: refer1]
The Budget Obama recently proposed attempts to serve both these goals. The guiding principle is to ensure that the budget includes the aforementioned forward looking pro-growth investments but also reduces funding for some of the programs expanded under the Stimulus in 2009-2010 to help cope with the great recession. It is a well thought Cut-And-Invest Agenda. For the most it cuts some spending while preserving important government duties and functions. It reduces the deficit by $1.1 trillion over ten years, 2/3 due to spending cuts and 1/3 due to increased revenue (expiration of Bush tax cuts in 2013). His promised freeze in discretionary spending alone saves $400 billion. Overall, Obama's plan brings the deficit from its current 11% of GDP level down to 7% by 2012 and 3% by 2015.
It boosts education spending by 11%, it preserves Pell Grants to 9 million students and retains their max level but limits them for summer and re-installs interest accruing during school years. It preserves most of the clean energy initiatives undertaken under the Stimulus investments, it promotes the development of small modular nuclear reactors, but also calls for eliminating $46 billion (over 10 years) in tax breaks and subsidies for oil, gas and coal companies. It increases transportation spending by $242 billion (including continuing support for high-speed rail) and cuts military spending by $78 billion (both over 10 years). It also includes responsible ways to head off cuts in how Medicare pays doctors, as well as to cap deductions for top income earners and use the revenue to extend relief from alternative minimum tax on middle class for three years. It also reduces programs for assistance to low-income families (heating, housing and other) that had expanded to help cope with the 2009-10 recession to pre-Stimulus levels.
The Politics of Government Shutdown
First let us look at what the GOP strategy has been so far. By pressuring the conservative Democrats in the Senate on fiscal discipline they managed to limit both the size and the scope of Stimulus. The $800 billion package was smaller than necessary and 1/3 of it was tax cuts. This resulted in a weaker than desirable recovery in 2009-2010 and their winning of the 2010 elections. They have been for sometime now pressuring the Federal Reserve to withdraw or not extend Quantitative Easing. In December 2010, they used political blackmailing to get the Bush tax cuts for the wealthy extended till December 2012.
Furthermore, by making deficit reduction the focal points of their 2010 campaign, they have shaped the conventional wisdom to erroneously espouse that high deficits are the main problem and not the high unemployment, stagnant wages, the unfair distribution of wealth, and our industrial policies that enable the off-shoring of jobs. By pushing for deep spending cuts for 2011 and 2012, the Republicans can guarantee that the economic recovery remains weak and then plan to use their domination of the Media and their superior messaging to blame it on President Obama and reduce his re-election chances in 2012.
The GOP strategy is to push for the largest spending cuts they can get. Both so as to satisfy their freshmen House representatives who got elected with the help of the Tea Party, but also to fulfill their key campaign promise of cutting $100 billion a year from the budget deficit. Out of pure ideology or political calculation they disregard the negative impact on the pace of economic recovery. GOP argues that the economy does not need government spending to recover, only lower taxes and deregulation.
Their hardball tactics became abundantly clear in the negotiations with Senate Democrats over both the debt ceiling and the budget. GOP is adopting an uncompromising stance and pushing for its maximum demands hoping to make the timid Democrats cave in and accept spending cuts that will hurt the Democratic constituencies and slow down, if not derail the recovery. So far GOP has managed to extract $4 billion in spending cuts and another $6 billion in cuts appears to be forthcoming (pending approval by the Senate), mostly from earmarks or programs that the President himself proposed to cut. It is unclear if Republicans will be able to extract additional concessions from the Democrats but a clear majority of GOP House representatives appear ready to push for further cuts. A Government Shutdown after April 8 is now becoming more likely. As the Democrats appear to be coming to the point that they must draw a line in the sand, Republicans under pressure from the Tea Party and their freshmen seem ready for a final confrontation. They appear to believe that through their domination of the Media and the conventional wisdom in the country, they will be able to withstand the backlash from government shutdown and successfully blame it on the Democrats and Obama.
On the other hand President Obama' strategy appears to be: (i) to accept some sensible reductions in the budget deficit so that the independents and people in the middle know that he recognizes the need for government streamlining and reduction of fraud and waste, (ii) to appear as the only adult in the room, one who stands in the middle and seeks compromise rather than a complete win for his budget proposals and (iii) as GOP pushes for more extensive cuts, to expose their ideological extremism and their unwillingness to compromise, and then appeal to both independents and moderates, as well as to his base by supporting the cut-and-invest agenda that we discussed above and the preservation of popular government programs and services. I hope that the last item does not remain wishful thinking on my side.
In this context the President and Senate Democrats accepted $4 billion in spending cuts that enabled the debt ceiling extension till March 18, and will most likely accept the additional $6 billion in cuts that the House just passed (on March 15) and provide a new extension till April 8. But another extension and more concessions to the Republicans will be a fatal mistake for Obama and the Democrats as important and popular to the Democratic base programs will have to be put on the chopping block. Hopefully, if it comes to a government shutdown, Obama will finally call the Republicans out and expose their total disregard for the needs of the middle class and the poor who are all served by essential Government programs and services, while GOP only cares for tax loopholes and subsidies for corporations and for extending the tax cuts for the super-wealthy. He should make the point that the budget should not be balanced on the backs of the middle class, the workers and the poor without commensurate sacrifices from the wealthy.
But to succeed in this the President and the Congress Democrats must get their message out loud and clear, in a convincing manner, and overcome the superior messaging of the Republicans. And this is doubtful given their dismal messaging during the 2010 campaign. One can only hope their effort is going to be more focused and sustained this time. The fight in Wisconsin has galvanized the Democratic base and helped serve as a strong reminder on whose side the Democrats and the President should be.