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Economy

Obama’s Budget: With Job Growth Tepid, Is Now The Time To Cut Spending?

President Obama will release a budget next week that replaces the automatic budget cuts known as sequestration with other spending cuts while also raising $580 billion in revenue and making cuts to Social Security and Medicare. The budget plan, as the Washington Post notes, is almost identical to the offer Obama made to congressional Republicans in an attempt to reach a “grand bargain” to offset sequestration at the beginning of March, and it is aimed at reaching a similar bargain in the near future.

“The president has made clear that he is willing to compromise and do tough things to reduce the deficit,” an administration official told the Post, “but only in the context of a package like this one that has balance and includes revenues from the wealthiest Americans and that is designed to promote economic growth.”

Under Obama, the U.S. has already cut $2.5 trillion from the deficit over the next decade. This plan would offset sequestration with roughly $1.8 trillion in other deficit reduction, including $580 billion in revenues, $400 billion from Medicare and other health programs, $130 billion from applying a new inflation measure (chained CPI) to Social Security, $200 billion from defense and domestic spending, and $200 billion from farm subsidies and retiree programs, the Post reported.

But while Obama remains committed to deficit reduction, there is little evidence that the U.S. needs to continue cutting spending, which has plateaued since he took office in 2009. As the following chart shows, government spending has typically driven economic recoveries, but spending cuts made over the past three years have held back America’s current recovery:

With borrowing costs at historic lows and unemployment remaining persistently high — the economy added just 88,000 jobs in March, according to the Bureau of Labor Statistics — the government could be making stimulative investments into the economy to help boost the recovery. That’s the path Obama originally sought in 2009 with the American Recovery and Reinvestment Act, and it worked: the stimulus turned around the economy and put the U.S. on a faster pace of recovery than Europe, which has consistently pushed to reduce deficits, has experienced.

Sequestration has already begun taking its toll on local economies, kicking children out of preschool programs, hurting schools, closing air traffic control towers, and leading to furloughs and job losses. But it is unclear how replacing it with a “grand bargain” that still cuts spending at a time when the country is experiencing a glut of long-term unemployment and tepid economic growth would make the situation much better, especially if the budget also includes cuts to Social Security and Medicare. There may be a consensus in Washington that cutting the deficit is the top priority, but evidence suggests that the U.S. may benefit more from the pursuit of policies like the American Jobs Act, the legislation Obama sought in 2011 that economists said would have boosted growth while creating more than a million jobs.

Economy

Austerity Pushes European Unemployment To New Record High

The 17-nation Eurozone set another dubious record in the opening months of 2013, as its unemployment rate continued to climb from its already record-high rate. The jobless rate also rose for the European Union as a whole as austerity efforts continue to plague the continent’s recovery from the Great Recession:

The jobless rate reached 12 percent in both January and February, the highest since the creation of the euro in 1999, Eurostat, the statistical agency of the European Union, reported from Luxembourg.

The January jobless rate for the 17-nation currency union was revised upward from the previously reported 11.9 percent.

For the overall European Union, the February jobless rate rose to 10.9 percent from 10.8 percent in January, Eurostat said, with more than 26 million people without work across the 27-nation bloc.

Despite clear warnings that austerity isn’t boosting growth, some of the continent’s largest economies remain committed to deficit reduction. The United Kingdom, now on the precipice of its third recession in four years, has indicated that it will continue efforts to reduce the deficit, even as it has fallen far short of its past goals. The UK, in fact, has largely failed to put a dent in its deficit because austere policies have inhibited economic growth. Even Germany, the continent’s stalwart economy through the initial recovery, is lagging, and France announced last month that it would not seek to hit its deficit targets in 2013.

The United States took a different approach to recovery, boosting the economy with President Obama’s stimulus plan in 2009 and putting itself on a better path for growth than Europe has experienced. But it too has since embraced austerity. Government spending has traditionally boosted the economy out of downturns, but it has plateaued in recent years and has instead hamstrung the current recovery. Further budget cuts, such as the across-the-board sequester that went into effect March 1, could only make that worse.

Thus far, a rising housing market and strong retail sales provide evidence that the U.S. is still recovering, but manufacturing numbers slumped in March largely on concerns about how budget cuts would effect the economy. And while conservatives still claim that America’s “runaway spending” is harming the recovery, the truth is that the U.S. isn’t spending enough to give its economy the boost it needs to leave the Great Recession fully behind it.

Economy

Boehner Agrees With Obama: The Debt Crisis Is Not ‘Immediate’

The arrival of budget season has brought debt panic back to the Beltway. But President Obama threw cold water on the matter last week, telling ABC’s George Stephanopoulos that the United States does not face “immediate crisis in terms of debt.” And this morning, House Speaker John Boehner (R-OH) essentially told ABC’s Martha Raddatz he agrees with Obama, calling the debt crisis “looming,” but not “immediate.”

“We do not have an immediate debt crisis,” Boehner said on ABC News’s “This Week With George Stephanopoulos.” “But we all know that we have one looming. And we have — one looming — because we have entitlement programs that are not sustainable in their current form. They’re gonna go bankrupt.” [...]

“[President Obama's] point, as he went on to say in that interview, is that we don’t — we don’t really need to do anything at this point. And I would argue that we do need to do something,” said the House speaker.

Debt is already projected to remain at or below its current share of the economy for the next decade, and it’s good that Boehner is standing in agreement with the president on that point.

Unfortunately, the budget the House Republicans just released does not reflect this realization. It cuts all spending that isn’t Medicare, Social Security, or the military down to near-historic lows over the next ten years. America’s economy remains in the doldrums, leaving the unemployment rate at 7.7 percent (it has never been that high for that long since the Great Depression) and all the real-world evidence we have indicates that austerity in depressions cripples economic growth. If everyone agrees the debt crisis is not immediate, then job growth and economic revival should be topping deficit reduction on the country’s list of priorities.

Nor is there a great deal of evidence to back up Boehner’s distinction between an “immediate” and “looming” debt crisis. The long-term projections of mounting debt he and other D.C. lawmakers rely on are in fact riddled with dramatic assumptions and uncertainties about the future behavior of both Congress and the economy.

Economy

Five Reasons Washington Shouldn’t Panic About The Debt

Once again, the March budget season has arrived, and Rep. Paul Ryan (R-WI) has engineered another draconian fiscal vision for the House Republicans. The plan would radically remake Medicare, decimate Medicaid, grant a huge tax cut to the wealthy, and slash support for the poor, investments, and civic infrastructure.

Ryan and his cohorts justify these plans by insisting that America faces a “debt crisis,” that the deficits we’re currently running are too high, and that we must act immediately to fix these problems. Centrists and other “serious” pundits and lawmakers throughout Washington have bought this argument, if not all the details of Ryan’s specific solution, and they’ve scoffed at President Obama’s insistence that we don’t actually face a looming debt crisis. Here are the reasons Obama’s right, and they’re all wrong:

1. We don’t ever have to actually eliminate the debt: The United States ran up a huge debt burden in World War II. More importantly, in raw dollar terms, we never repaid that debt. We simply grew the economy so that the size of the debt fell in comparison. That’s what’s happening in graphs where the debt burden drops in the post-war years. That burden is measured as a ratio of debt-to-GDP, and in ratios the denominator matters as much as the numerator.

2. The budget doesn’t actually have to balance to reduce it: If we can keep deficits under a certain threshold every year, then economic growth will overtake it, meaning our debt-to-GDP ratio will either stay the same or even drop. For the immediate future, the economy looks set to grow by about 4 percent a year in nominal terms (that is, real growth plus inflation). If we can keep each year’s deficit to 4 percent or less of public debt already held, debt-to-GDP will stabilize. America can, in fact, run deficits in perpetuity.

3. The debt is already as balanced as it needs to be: Federal spending involves a host of programs called “stabilizers” — spending that automatically kicks in when the economy tanks, without any acts on the part of lawmakers, boosting GDP growth and helping Americans who have lost their jobs. These include unemployment insurance, food stamps, welfare, Medicaid, and many others. Tax revenues also naturally fall as unemployment rises.

The Congressional Budget office just released a report that stabilizers will add $422 billion to the deficit in 2013. That leaves $423 billion — out of the estimated $845 billion deficit for the year — that isn’t due to the automatic stabilizers. Publicly held U.S. debt is currently around $11.5 trillion, and $423 is less than 4 percent of that.

Take out the stabilizers, and the deficit is within the window necessary to stabilize the debt. And all we have to do to unwind the stabilizers is get the economy firing on all cylinders again. This holds true for about the next decade, before growth in Social Security, Medicare, and Medicaid finally begin to slowly overtake it. The country still has problems, but it has lots of time to sort them out.

4. The “debt crisis” is not a certainty: Paul Ryan may talk as if it is, but it’s merely a projection — one possible result if the CBO’s guesswork about the future proves accurate. The Center for American Progress recently dove into CBO’s methodology, and found that the projections build in a host of sometimes-dramatic assumptions about Congress’ future spending and taxation choices, as well as other factors that could very well not come to pass.

Beyond trying to predict future Congress’ policy preferences, much of the future debt is based on projections that health care costs will continue growing at their previous trend. But the whole point of health care reform is to alter that trend by altering health care markets. Obamacare may already be doing this. CBO’s projections for Medicare spending over the next decade dropped by $500 billion between 2010 and 2013, simply because health care cost growth unexpectedly slowed.

In fact, if that slowdown becomes the new norm, Medicare spending will stay essentially flat as a share of the economy from here on out. That doesn’t show up in CBO’s long-term projections because their methodology uses cost growth over the last two decades to predict future trends. (See page 60.) It’s literally within the realm of reasonable possibility that the long-term debt problem is already solved — all without lawmakers having to cut a dime.

5. We don’t know how much debt actually causes crisis: Ryan and others often cite a finding that economic growth slows as debt-to-GDP reaches 90 percent. But there’s a big correlation-causation problem with this. Remember the denominator: slowing GDP, regardless of debt, could raise debt-to-GDP just as much as higher debt could. And the countries that fit with the 90 percent threshold prediction also present an apples-to-oranges problem when compared to America. Britain, Japan, and France — advanced democracies like ours, with their own currency — shouldered debt levels far in excess of 90 precent over extended periods of time in the past. No debt crisis arrived.

In conclusion: the “debt crisis” is a mere phantom — only one of many possible futures, and far from a certainty. The interest America is paying on its debt is currently lower than it was in the 1990s, despite a lower debt-to-GDP ratio then. When inflation is factored in, current real interest rates on our debt are negative. Financial markets are willing to pay us to borrow from them.

Meanwhile, every dollar we cut — nay, every dollar we fail to borrow — is a dollar that isn’t going to shore up the safety net, to rebuild the country’s infrastructure, or to support struggling Americans while their livelihoods remain on the line. That we’re passing on this opportunity to repair our country, much less even considering the monstrosity that is the Ryan budget, really is absurd.

Economy

Why Paul Ryan’s Plan To Balance The Budget Is Built On Fantasy

House Budget Committee Chairman Paul Ryan (R-WI) unveiled the third version of his budget this morning, and due to the demand of his party’s conservative base, this version supposedly achieves balance within 10 years, at least a decade faster than past versions would have theoretically achieved the same goal.

But just like past versions, this version will fail to actually achieve the balance Ryan claims. That’s because the budget only gets to a balanced level in 2023 because Ryan has assumed revenue and spending levels that his budget can’t actually match. Ryan’s budget provides more than $7 trillion in tax breaks to the wealthy and corporations without proposing specific ways to make up for that lost revenue, meaning his budget — the one he has touted as a plan to rein in Washington’s runaway deficits and debt — will fall short of his goals, as Center for American Progress Tax and Budget Policy Director Michael Linden explains:

Last year the Tax Policy Center estimated that these provisions would generate revenue equaling just 15.8 percent of GDP in 2022. Extrapolating to 2023 suggests that Rep. Ryan is missing about $840 billion of revenue in 2023 alone, and approximately $7 trillion over the entire 10-year period from 2014 through 2023. After accounting for the added interest costs from all of these unpaid-for tax cuts, Ryan’s budget would still be about $1.2 trillion in the red in 2023.

But it isn’t just fantasy revenue levels on which Ryan relies. He also is basing his budget on massive spending cuts that aren’t laid out in specific (and haven’t been in previous versions either) and aren’t realistic, given that they would take spending levels lower than they have ever been before. As Linden notes, Ryan’s budget would drop non-defense discretionary spending to just 2.1 percent of GDP, even though it has never totaled less than 3.2 percent of GDP since records began in 1962.

It’s for this reason that the Congressional Budget Office told Ryan it couldn’t give him a better long-term outlook for his budget — the only reason the nonpartisan office could judge the plan at all was because it applied the revenue and spending assumptions he provided. And because Ryan cuts so much revenue without a plausible way to make up for it, his plan to reduce the debt would likely add trillions of dollars to it instead.

Health

CBO May Have Undershot Medicare’s Future Deficit Reduction By Over $300 Billion

Several weeks ago, the Center on Budget and Policy Priorities analyzed the latest budget outlook from the Congressional Budget Office, and found that Medicare’s projected spending between 2010 and 2020 had dropped by over $500 billion since CBO’s projections in 2010.

This was effectively free deficit reduction: no spending had to be cut or policies changed. Health care markets simply shifted in an unexpected way that slowed the growth of health care costs — and what Medicare is projected to spend to buy health care for seniors slowed accordingly.

The big question is whether this slow down is temporary or long-term. David Cutler and Nikhil Sahni took a closer look and found that CBO’s numbers assume the slow down is temporary. If that assumption is wrong, then Medicare could see $363 billion in additional savings by 2023.

Cutler and Sahni constructed the graph below using CBO data. The blue line shows CBO’s 2010 forecast of Medicare’s “excess” annual spending growth. (The increase in spending per beneficiary minus the increase in gross domestic product per capita.) The green line shows CBO’s 2013 forecast. As you can see, while the growth projected in 2013 undercuts what was projected in 2010, the lines re-converge after 2018:

Basically, CBO is projecting that excess spending growth will jump back from its recent average of -2.9 percent to 1.4 percent after 2018.

Cutler and Sahni raise several reasons why this projection could be mistaken, and why the changes we’ve seen will stick: Medicare and Medicaid are moving to reduce reimbursement rates; digital record-keeping and new business models are lowering administrative costs; more low-cost generic drugs are becoming available as patents end, allowing for low-cost generics); we’re turning to expensive and overused procedures less often; and many health care organizations are restructuring to deliver care more efficiently.

This is important because Medicare is the primary driver of CBO’ long-term debt projections. As a result, predicting our future debt levels is a very tricky business, something the Beltway would do well to remember as it’s been gripped by debt panic. Changes in health care markets may have quietly lowered Medicare’s future spending by levels that rival the deficit reduction in either the “fiscal cliff” deal or 2011 Budget Control Act — all without lawmakers reducing any of Medicare’s benefits.

Equally important, we may very well owe many of those market changes — especially lower reimbursement rates, digitized records, and delivery system efficiency — to the reforms and incentives built into Obamacare. If true, that would make the health care reform law a far larger deficit reducer than anyone, including the CBO, has given it credit for.

Economy

Federal Reserve Chairman Explains Why Looming Budget Cuts Could Be Bad News For Deficit Reduction

Budget cuts under the so-called “sequester” will go into effect on Friday. Independent estimates shows that the cuts will cost anywhere from 700,000 to 750,000 jobs. And the end result may be very little deficit reduction as well, as a more depressed economy will not produce as much in the way of revenue, as economist Adam Hersh explained.

During a hearing before the House Financial Services Committee today, Federal Reserve Chairman Ben Bernanke patiently tried to explain this to Rep. Sean Duffy (R-WI), who wasn’t having it:

DUFFY: Instead of encouraging responsibility, you come in and say “listen to cut 2 percent of our budget, you can’t do it. It’s going to have a great impact on our economy.” Mr. Chairman that doesn’t make sense to me.

BERNANKE: Well, I think most economists, including the CBO, would say this will cost a lot of jobs in the short run. And you can achieve the same results with longer-term programs. [...]

DUFFY: So then are you here telling us if we cut $85 billion in a more reflective way — in the bad spending that I just referenced — you would support it? It’s a good idea if we’re not doing it by way of the sequester, but we had a little more reflective analysis on the $85 billion.

BERNANKE: It would be better.

DUFFY: So is it better or you agree with us that we should actually reduce spending?

BERNANKE: I’m still concerned about the short-term impact on jobs. And you don’t get as much benefit as you think, because if you slow the economy that hurts your revenues and that means your deficit reduction is not as big as you think it is.

Watch:

For evidence of what Bernanke is talking about, one needs to look no further than Europe, where austerity — rather than sparking a recovery — has led to weak growth, high unemployment, and yes, more debt. In fact, the EU’s debt “was barely changed at 90 percent of gross domestic product in the third quarter of 2012 compared with 89.9 percent for three months earlier…It was up from 86.8 percent of GDP a year earlier,” even after the continent embraced deep spending cuts and reforms.

Economy

Why Sequestration May Not Actually Reduce America’s Deficit

The United States is on the brink of sequestration, the $1.2 trillion in automatic budget cuts included in the summer 2011 deficit deal that will begin taking effect March 1 if Congress does not act to avert them. The goal of the cuts is to reduce America’s budget deficit, which remains Washington’s focus even as unemployment is high and the overall economic recovery is modest at best.

Despite the $85 billion in cuts that will take place this year, it is entirely possible that sequestration won’t actually lead to substantial shrinking of America’s deficit. There are a number of reasons for that, as Scott Lilly from the Center for American Progress explained in a column today. The primary reason, though, is that fiscal contraction caused by sequestration is likely to slow economic growth, reducing tax revenue and preventing meaningful deficit reduction, as CAP’s Adam Hersh notes:

Figure 1 also shows that the projected effect of the sequester will be to lower U.S. economic output by $287 billion from where we would be without any fiscal contraction—barely ahead of where the U.S. economy was at the end of 2012. To be certain—with sequestration on top of other fiscal contraction draining so much momentum—the U.S. economy would need to steer clear of all other risks to growth: potential oil- and commodity-price shocks, slowing global demand for U.S. exports, and the faltering confidence in the governability of U.S. economic policy. It is possible none of those risks will rear their ugly heads in the next year, but it would be foolish to bet America’s economic future on it.

Lilly estimates that the cuts could result in $17 billion in lost revenue this year, but because reducing government investment will also inhibit private sector growth, the effects may be even bigger than the Congressional Budget Office projects:
Read more

Health

Medicare’s Projected Spending Has Dropped $500 Billion Without Lawmakers Cutting A Dime

Medicare will spend $511 billion less between now and 2020 than was predicted two and a half years ago, according to the latest number crunching by the Center On Budget and Policy Priorities. More importantly, this drop occurred completely separate from any changes in government policy — rather, it resulted from an overall slowdown in the growth of health care costs.

The last time the Congress and the President actually altered Medicare policy in order to bring down the program’s spending was when they passed health reform in March of 2010. By comparing the Congressional Budget Office’s projections from August of that year with their projections from earlier this month, and by leaving out the the SGR cuts and the Medicare cuts in sequestration, the CBPP was able to isolate how much Medicare’s spending is anticipated to drop due purely to changes in the health care markets. And the drop is considerably larger than the proactive cuts in Medicare spending the Simpson-Bowles plan was calling for back in December of 2010:

According to the CBO itself, its projections for Medicare and Medicaid spending between now and 2022 dropped 3.5 percent since its previous projection in August of 2012.

Spending on Medicare and Medicaid is the main driver of the country’s long-term debt problem. But because the programs buy health care, larger economic forces in the health care market that drive up costs also drive up their spending, regardless of any specific policy enacted by lawmakers. Conversely, if health costs begin to slow, that will bring spending down — and there’s evidence that’s exactly what’s happened over the last few years.

Between 2009 and 2011, all spending in the health care system, both public and private, grew at 3.9 percent — the lowest annual rates we’ve seen in 52 years. 2012 looks like it will turn out to be similarly sluggish. Some of this is certainly due to the recession and ongoing depression. But an increasing number of economists and experts are convinced a big piece of the slowdown is also a more permanent restructuring of the way health care markets buy, sell, and deliver care.

No small part of that change may be due, in turn, to the passage of Obamacare, which put in place a host of new incentives and reforms to move health care delivery in a more efficient direction. And if Obamacare’s reforms continue pushing the health care system to adapt, then the United State’s fiscal future could continue to improve without lawmakers having to cut a dime.

Economy

Austerity Fail: After Massive Spending Cuts, European Countries Fail To Hit Deficit Targets

European austerity has already proven a terrible failure, driving the continent as a whole back into a recession and pushing unemployment to record levels. Despite promises from leaders across Europe that reducing deficits would spur growth, that hasn’t been the case. And worse yet, the focus on austerity hasn’t even led to the deficit reduction many European countries are chasing.

The United Kingdom has fallen far short of its deficit reduction goals, and France is likely to miss its deficit reduction targets too. Today, Fitch ratings announced that Spain too had missed its target, and it will miss its 2013 target thanks to a lack of economic growth:


Though European deficits are declining, they are doing so far more slowly than projected thanks to a lack of economic growth that has made much of the deficit reduction policies counterproductive. European countries continue to cut spending to reduce deficits, causing more fiscal contraction that in turn slows down deficit reduction efforts or, worse, makes deficits larger. When the United Kingdom, which has the economy most comparable to America’s, instituted its first round of austerity in 2010, it projected its deficit would fall from 4.8 percent of GDP to just 1.9 percent. Instead, the country is on the brink of a third recession and its deficit stands at 4.3 percent of its economy. In other deficit-focused countries, unemployment has skyrocketed — Spain’s unemployment rate topped 25 percent in January.

The United States originally approached economic recovery by focusing on stimulus instead of deficit reduction, a path that led to a stronger recovery than Europe’s. But it too has since embraced deficit reduction, the most serious round of which looms on March 1 when sequestration will begin taking effect. Those spending cuts could knock 0.6 percent off of annual economic growth while costing the nation 700,000 jobs. Drops in federal spending have already hurt the recovery, and if Europe is any indication, efforts to rapidly reduce the deficit will likely serve only to reduce growth and complicate deficit reduction efforts instead.

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