In this post we ague that the ongoing Battle for the 2011 Budget and the imminent, by all indications inevitable, Government Shutdown are carried out under an entirely false premise. It will accomplish nothing towards alleviating our deficit and debt problems but will rather make these problems worse by derailing the frail economic recovery. We review the recent history of the actions as well as events that caused the current unsustainable levels of budget deficits and the national debt. We also describe the nature of the middle-term and long-term components of the deficit and assert that the truly necessary and effective remedies for those are not part of the current debate for the 2011 budget. We actually suggest that no deep spending cuts for 2011-12 are enacted and express support for the President Obama's modest budget proposal. Finally, we briefly discuss the politics of the Shutdown and the Republican intrasigence which is motivated by ideological extremism and possibly by the desire to derail the economic recovery in their effort to deny Obama reelection.
When President G.W. Bush took office in early 2000 the debt was $5.7 trillion and there was a projected budget surplus of $260 billion for fiscal year 2001 (Oct 2000 - Sept 2001). Bush in his 8 years added to the debt $5.5 trillion -- essentially doubling it -- by not paying for: two wars, new tax cuts and the expansion of Medicare (Part D for prescription drugs to seniors). Bush also bequeathed to President Obama in early 2009 a $1.2 trillion budget deficit and a tanked economy which was reeling after the financial meltdown of Fall 2008 and was losing 750,000 jobs a month (Sources: Departments of Treasury and Labor).
Obama and the Democratic Congress in 2009-10 stabilized the economy, averted the pain and misery of another Great Depression, and put the country to a path of recovery. By end of March 2011 the economy had added 1.7 million jobs, 200,000 of them in March alone, while the Stimulus saved $2.3 million jobs. But the recession of 2008-2009 cost $1.6 trillion in lost tax revenues, the TARP bailouts cost $70 billion (since most of the original $700 billion has been paid back) and the two-year Stimulus cost roughly $900 billion (1/3 of which was additional tax cuts for individuals and corporations); if we also add the continued funding of two ongoing war efforts and of Medicare Part D, the total increase to the debt amounted to $3 trillion in 2009-10.
Moreover, in Dec 2010, a Tax-Cut Compromise (i) extended the Bush tax cuts to Dec 2012 and (ii) provided accelerated R&D tax credits to corporations, it cut payroll taxes and extended jobless benefits also the earned income, child, and college tax credits to Dec 2011. This tax cut package will cost around $900 billion for the next two years, this together with continued funding for the two wars and Medicare Part D and other government expenditures will account for adding a total of $3 trillion to the debt in 2011-12.
In retrospect Bush should be blamed for amassing debts and deficits due to not paying for wars, tax cuts, and new programs and, to a large extent, for enabling the 2008 financial collapse and the resulting great recession. Obama should be credited for alleviating the pain and misery of the recession and jump-starting the current economic recovery, but in the process he was forced to maintain the budget deficits at unsustainable levels and thus also add to the debt.
Nevertheless, by January 2011 the national debt reached $14.2 trillion and is projected to be over $17 trillion by end of 2012. It is important to make the distinction between the two main components of debt: the $5.7 trillion (debt level at the end of 2000) and the $8.5 trillion added during the Bush and Obama administrations -- $5.5 trillion under Bush and $3 trillion under Obama so far. The former is long-term debt due to more than 200 years of operation of the US Government. The latter is medium-term debt that was created as detailed above by the recent (2001-2010) budget deficits due to the Iraq and Afganistan wars, the Bush tax cuts, the Medicare drug-plan, the recent great recession, and the government's response to it.
This medium-term deficit can be eliminated relatively easily by restoring taxes to their pre-Bush levels, ending the wars, removing the remaining stimulative measures of the 2010 tax-cut compromise, curtailing Medicare Part D, and freezing or modestly reducing discretionary spending (including cuts to military spending).
On the other hand, there is a long-term component in the deficit that will become increasingly more evident and start dominate the total yearly deficit as we are progressing towards 2020 and beyond. This is a much more difficult issue to tackle. It comes from the projected growth of Medicare, Medicaid and, to a lesser extent, Social Security. It is the result of 'baby boomers' having paid far less in taxes than they will draw in benefits. To put it in simple terms: promises have been made that can not be kept. To tackle this and the debt, well thought reform of these programs will be needed coupled with raising significant revenues by reforming the Tax Code for both corporations and individuals, serious reductions in military spending, as well as sensible cuts in discretionary non-security spending. None of these ingredients alone will accomplish the above goal, only a mix of entitlement reform, raising revenue and spending cuts enacted together, so that the sacrifice is shared by all in an equitable manner, may help provide the political will needed to move forward.
However, given the frailty of the ongoing economic recovery it is not wise to pursue a major overhaul of government spending before the economy is strong and unemployment falls significantly (say below 6%). Even modest cuts in discretionary spending may cause a double-dip recession and bring us back to our 2008-9 predicament; in my recent diary entry in Daily Kos of April 4 (click here: refer1) I address in detail this threat to derailing the economic recovery.
In this context, Obama's 2011 Budget proposed a modest $40 billion in cuts from the 2010 baseline by freezing federal workers' pay and discretionary spending. His Tax-And-Invest proposal couples critical investments in education, innovation and infrastructure with cuts to programs that were expanded in 2009 to help cope with the recession. It is clear that the President's goal is to keep the recovery going and increase our global competitiveness. In my Erie Times News Op-Ed of March 5 (click here: refer2) I discuss the President's budget proposal but also provide a short comparison with the Republican proposal.
By contrast GOP proposed $61 billion in spending cuts (beyond the $40 billion already proposed by the President). These target only the non-security discretionary spending (representing just 13% of total budget) and are spread across-the-board affecting practically all federal agencies and reducing or eliminates essential programs and services provided by the government. In my Daily Kos diary entry of March 16 (click here: refer3) I provide a detailed comparison of both rival proposals from an economic standpoint and also discuss the political strategies that guide the negotiations of the two parties.
Unfortunately, the list of programs at risk of been seriously underfunded or completely eliminated includes several programs which provide assistance to the neediest among us, such as, $11.2 billion for early childhood programs, $8.9 billion for low-income housing, $7.6 billion for supplemental nutrition for poor families, $4.6 billion for teacher training and after-school programs, $4.1 billion for unemployed and new workers, $2.5 billion low income home energy assistance for poor families, $2.5 billion for community health centers, $2 billion for homeless assistance grants, $420 million for legal services for the poor, $317 million for Title X planning; these programs add to a total of $44 billion. By contrast just the cost of extending the Bush tax cuts for the top brackets (with taxable revenue above $250,0000) for one year is $55 billion and similarly the cost of the estate tax cut for millionaires is $20 billion.
Recently a compromise of $33 billion in spending cuts (out of GOP's $61 billion requested) came close to be agreed upon -- actually a $10 billion portion of this was implemented via two stopgap spending bills that allowed the government to operate till April 8. But at the last moment the GOP under pressure from its Tea Party backers reneged and asked for deeper cuts, while the Democrats refused to accept the Tea-Party backed GOP freshman' s "policy riders" -- amendments to GOP's proposed budget that serve strictly its social and cultural agenda -- and final agreement was thwarted.
These ideologically motivated policy riders include defunding the implementation of Health Care Reform, Planned Parenthood, crippling the Environmental Protection Agency, eliminating funding of NPR and PBS, and in essence abolishing PELL grants for college students and the Endowments for the Arts and Humanities. All these are tiny portions of discretionary spending and have more of a social or cultural importance rather than budgetary consequences. Imminent Government Shutdown appears now inevitable.
Given the potential disruption of the economy and the expected adverse effect on the lives of millions of people, shutting down the Government over the aforementioned 'policy riders' and the level of the cuts -- $61 billion vs $33 billion -- seems absurd and ill-intended. They appear to be ideologically and politically driven by GOP's takeover by the Tea Party and the urge to fulfill its 2010 campaign promises under any cost. GOP does not want to compromise. They may even wish to close the Government so as to cause an economic disruption, they know well that even modest spending cuts may derail the fragile recovery and they have made their political calculations; on the other hand Obama and the Democrats are playing defense and they have their own strategy [refer to my previous Daily Kos posts (click here: refer1, refer3, and refer4)]. Let us not forget that some of the GOP leaders have repeatedly stated that their primary goal is to deny Obama reelection. They believe that through clever political maneuvering, their domination of the Media and their considerable influence on shaping the conventional wisdom and national narrative, they will be able to blame everything on Obama and the Democrats.
It is also possible that Republicans are trying to test how much they can push the Democrats. They know of the divisions in the Senate between liberal, moderate and conservative Democrats and their inability to block serious spending cuts. This may be a rehearsal for the forthcoming much bigger fight on the 2012 Budget. The recently released proposal by Rep Ryan (R-WI) includes $6.2 trillion in cuts (over 10 years), it replaces Medicaid by block grants to the States and Medicare by vouchers, and reduces or eliminates all kinds of other programs that help the middle class and the poor. In essence it represents an attempt to repeal America's 20th Century Social Contract. We can only hope as discussed near the end of my recent Daily Kos diary entry (click here: refer4 ) that the President and the Democrats in Senate will resist this with everything they got.
In final analysis whatever the consensus amount ends up to be -- for example, $40 billion in cuts correspond to 2.7% of the 2011 deficit and to only 0.28% of the national debt -- it will be of minimal impact on reducing the deficit or the debt. At the same time there will be significant personal cost to the 800,000 federal workers and many others who will be affected by the Shutdown in a number of different ways. Moreover there will be significant negative economic impact due to the Shutdown itself (however short it is), while the size of Spending Cuts represents a clear and present danger to derailing the economic recovery, as we have already discussed above and in the references provided. Therefore I feel that my assertion, that the battle for the 2011 budget and resulting imminent government shutdown is conducted under a false premise, is justified, because the reasons for the current impasse are political rather than economic.