The bipartisan budget agreement released late Tuesday is being celebrated, largely for showing that a deal is possible.
The deal is admittedly small ball, reducing about half of the sequester cuts in 2014 and one-quarter in 2015, a total of $41.7 billion in increased outlays over the two years, according to the Congressional Budget Office, when the government is projected to spend something over $7.4 trillion.
The deal was reached by give and take. Democrats defended Social Security and Medicare from cuts Republicans wanted. Republicans defended billionaires and multinationals from taxes that Democrats wanted. Democrats got some relief from short-term sequester cuts; Republicans got increased long-term deficit reductions. Democrats saved domestic programs from deeper cuts; Republicans saved military programs.
But what is the actual effect on the economy? The deal has been trumpeted as having great beneficial effects, saving hundreds of thousands of jobs that would otherwise be cut, while boosting business confidence that Congress isn’t completely dysfunctional and won’t continue to “lurch from crisis to crisis,” a central talking point of the rollout. Let’s take a look at each in turn.
1. The Jobs Effect
Reducing the projected sequester cuts will save jobs that would otherwise have been cut. The Bipartisan Policy Center estimated that the full sequester cuts would cost about 700,000 jobs over the course of 2014, and slow growth by 0.6 percent. Reducing those cuts by half will reduce the carnage. Economist Joel Prakken of Macroeconomic Advisers projects the agreement might increase growth by one-quarter of a percentage point compared to continuing the full sequester cuts.
But half of the mindless across-the-board sequester cuts will continue in fiscal year 2014 and three-fourths in 2015. This will continue harsh effects on government services. If allocations are made proportionately (a big “if” given that Republican appropriators will have disproportionate power in rushed, backroom deals), back-of-the-hand estimates by one expert suggested Head Start will likely have to cut 150,000 children from the program instead of 180,000.
And the budget itself will remain constrictive. 2014 discretionary spending levels are still projected to be lower than they were in 2013 even before adjusting for inflation.
Moreover, the deal excludes the renewal of emergency jobless benefits. This will cut 1.3 million jobless and their families off of assistance by the end of the year. Renewal would put an estimated $26 billion directly into the economy over the course of the year, and generate an estimated 300,000 jobs. The CBO estimates that the net increase in federal outlays in fiscal 2014 from the bipartisan budget deal (sequester relief minus the spending cuts elsewhere) will be $23.3 billion. Not renewing emergency jobless benefits will simply erase the economic benefits of the budget deal.
In sum, the beatings will continue, with a small reduction in strokes. As Larry Mishel, Director of the Economic Policy Institute, concluded, the deal will “do essentially nothing to alter the disastrous trajectory that has characterized fiscal policy since 2011.” And even that wiggle room word “essentially” is generous.
2. The Confidence Fairy Returns
The very fact of a deal is celebrated as likely to increase business confidence, end “fiscal uncertainty” caused by manufactured budget crises, and lead to more investment and more jobs.
Paul Krugman has famously scorned these theories as belief in the “confidence fairy.” Business invests when it sees market opportunities. It hires when it sees demand for its products rising. In the current economy, businesses are sitting on dough; banks are parking money at the Federal Reserve. They lack customers, not confidence.
Sober business leaders will project a continuation of slow growth, continued mass unemployment and income stagnation, limited growth in export markets, the Federal Reserve beginning to reduce its extraordinary measures, and the Federal budget still in austerity. Military contractors aren’t going to hire millions of new employees because the cuts in military procurement will be somewhat less. They may not lay off as many workers, but they aren’t likely to add many.
Moreover, as the old Russian proverb taught, one swallow does not make a spring. There is no reason to think that this deal leads to a new era of bipartisan cooperation. Republican leaders wanted a deal because they couldn’t afford to shut the government down again politically, and because they wanted to keep railing about Obamacare. Democrats wanted a deal because…well, because they are Democrats.
But the conservative outside groups are mobilizing against the deal. The Tea Party right will vote in large numbers against it. And in about March, the government will run into the debt ceiling again, and a new authorization will be needed to cover the debts that the Congress has already agreed to run up. The era of bipartisan accord might well not last until the spring.
3. Austerity Costs Jobs
The deal provides relief from some of the perverse and destructive sequester cuts. But it sustains Washington’s focus on deficit reduction and its commitment to austerity. The two-year agreement contains no initiative that would address the challenges we face. It provides nothing to rebuild our decrepit infrastructure and put people to work, nothing that would fund universal preschool or make college affordable, nothing that would boost research and development to insure the U.S. remains at the cutting edge of innovation, nothing that would even rebuild essential services – from clean water enforcement to FBI capacity – that have suffered over the last years. It keeps the doors open and the lights on, and nothing more.
“Regular order” – doing congressional business without manufactured crises – is a good thing, but it is of limited value if the regular order produces agreements that don’t address the challenges we face. And in that regard, this agreement fails completely.
Austerity has been discredited in both theory and practice. The former bastions of fiscal austerity – the International Monetary Fund and the Federal Reserve – have converted in the face of reality, and now plead with governments to increase spending and stimulus to put people back to work.
Somehow Washington has failed to get the message. This deal doesn’t end the cutting; it only reduces its severity. It doesn’t generate jobs; it only cuts fewer of them. It doesn’t help the economy; it only reduces the harm to it.
Surely we can do better than that.