This morning, Eric Rosengren, chief executive of the Boston Federal Reserve, cautioned lawmakers against further fiscal retrenchment, lest they slow the recovery. As he said at the Global Interdependence Center’s Central Banking Conference in Italy: “Given the economic realities I would urge policymakers to consider scenarios where some elements of fiscal rebalancing take effect only after the economy has more fully improved.”
He’s right, in large part because Congress has already done a fair amount of deficit reduction. Beginning in 2011, with unemployment still high and the economy on a long, slow climb out of recession, Congress — led by a new Republican majority in the House of Representatives — moved to make big cuts in medium-term discretionary spending. It slashed $1 trillion with the Budget Control Act of 2011, and followed that with hundreds of billions more in spending cuts and tax increases with the fiscal cliff deal and sequester.
Now, as a result of this deficit reduction, the Congressional Budget Office projects a $642 billion budget deficit for fiscal year 2013, down $200 billion from its projection at the beginning of the year, and the lowest level of deficit spending since President Obama entered office. The near-term deficit projection also shows improvement; the CBO estimates a 2015 deficit of $378 billion. For Washington’s deficit hawks, this is cause for celebration. It’s a sign the federal government is on its way to a more sustainable debt load.
But this rapid deficit reduction is far less of a boon for most Americans, who have to live in an economy that’s been largely stalled by Congressional inaction. At 7.5 percent, unemployment is still too high, and there’s little sign of rapid improvement. According to most projections, joblessness won’t reach pre-recession levels for another three years.
Congress’ push for deficit reduction has a lot to do with this. As noted in the New York Times last week: “The nation’s unemployment rate would probably be nearly a point lower, roughly 6.5 percent, and economic growth almost two points higher this year if Washington had not cut spending and raised taxes as it has since 2011.”
To put that in more concrete terms, 1.5 million more Americans would have jobs if not for Washington’s decision to pursue deficit reduction in the midst of a sluggish economy.
Unfortunately, news of successful deficit reduction is unlikely to result in any respite from new cuts or tax increases. The Obama administration still has its Social Security cuts on the table — as part of a potential “grand bargain” — and Congressional Republicans are gearing up to demand still more spending cuts in exchange for raising the debt ceiling.
Will Washington avoid endangering the still-fragile recovery with further deficit reduction? If the refusal to end or replace the sequester is any indication, I wouldn’t hold my breath.
By: Jamelle Bouie, The American Prospect, May 16, 2013
“The Incredible Shrinking Issue”: Lack Of Jobs, Not The Deficit, Is The Actual Scandal That Congress Should Be Trying To Grapple
Republicans gleeful over the recent slew of scandals afflicting the Obama administration – some imagined and some worthy of the name – should be thanking their lucky stars that they have new issues to wield as political cudgels. After all, their favorite of the last few years, the federal deficit, is getting smaller and smaller and smaller.
The Congressional Budget Office – Washington’s nonpartisan number crunchers – released new projections Tuesday showing that the deficit will fall to $642 billion this fiscal year, a 24 percent drop in its projection from just a few months ago. The improvement is primarily due to increasing revenue and fewer expected outlays to government-backed mortgage giants Fannie Mae and Freddie Mac.
If this holds, it will be the smallest the deficit has been since President Barack Obama took office. As a percentage of the economy, the deficit will have been cut by more than half over Obama’s first five years, from 10.1 percent in 2009 to 4 percent in 2013.
And the incredible shrinking deficit doesn’t stop there, falling to 2.1 percent of gross domestic product by 2015, which, as the New York Times David Leonhardt noted, is “a level many economists consider healthy.” (For comparison’s sake, the much-ballyhooed Simpson-Bowles budget plan called for a deficit in 2015 of 2.3 percent of GDP.) It’s also worth noting that the CBO assumes perpetual levels of both war spending in Afghanistan and aid for Hurricane Sandy victims, so the projections for future years will certainly be lower than they appear now.
This report is one more piece of evidence showing that the economic discussion that has gripped Washington recently is absurdly backwards. The short-term deficit is barely a problem, while the long-term issue for the nation’s finances remains, as everyone has known for years, spiraling health care costs (but there’s reason to believe they are also coming down).
What the dropping deficit has not done is spark the sort of economic growth or job creation that will bring down America’s still-too-high unemployment rate; lack of jobs, not the deficit, is the actual crisis with which Congress should be trying to grapple. In fact, as the Center on Budget and Policy Priorities’ Jared Bernstein notes, the deficit is coming down too fast considering the country’s current economic doldrums:
The deficit is falling quickly when it shouldn’t be and rising later when it shouldn’t be.
Certainly, if facts drove the day, this update would be a fire hose for the hair-on-fire austerity crowd re: the near-term deficit. The patient is checking out of the hospital while Drs Cantor, Ryan, and McConnell are still preparing for major surgery.
Considering that Republicans on the House Budget Committee claim that the CBO report “provided a fresh reminder of Washington’s out-of-control spending,” chances seem slim that those pushing austerity will change their tune anytime soon. So perhaps the silver lining in lawmakers focusing on what they see as today’s hottest “scandal-gate” is that it will distract them from doing any more to undermine the economic recovery or to cut a deficit that doesn’t need to be cut anymore.
By: Pat Garofalo, U. S. News and World Report, May 14, 2013
So, about that fiscal crisis — the one that would, any day now, turn us into Greece. Greece, I tell you: Never mind.
Over the past few weeks, there has been a remarkable change of position among the deficit scolds who have dominated economic policy debate for more than three years. It’s as if someone sent out a memo saying that the Chicken Little act, with its repeated warnings of a U.S. debt crisis that keeps not happening, has outlived its usefulness. Suddenly, the argument has changed: It’s not about the crisis next month; it’s about the long run, about not cheating our children. The deficit, we’re told, is really a moral issue.
There’s just one problem: The new argument is as bad as the old one. Yes, we are cheating our children, but the deficit has nothing to do with it.
Before I get there, a few words about the sudden switch in arguments.
There has, of course, been no explicit announcement of a change in position. But the signs are everywhere. Pundits who spent years trying to foster a sense of panic over the deficit have begun writing pieces lamenting the likelihood that there won’t be a crisis, after all. Maybe it wasn’t that significant when President Obama declared that we don’t face any “immediate” debt crisis, but it did represent a change in tone from his previous deficit-hawk rhetoric. And it was startling, indeed, when John Boehner, the speaker of the House, said exactly the same thing a few days later.
What happened? Basically, the numbers refuse to cooperate: Interest rates remain stubbornly low, deficits are declining and even 10-year budget projections basically show a stable fiscal outlook rather than exploding debt.
So talk of a fiscal crisis has subsided. Yet the deficit scolds haven’t given up on their determination to bully the nation into slashing Social Security and Medicare. So they have a new line: We must bring down the deficit right away because it’s “generational warfare,” imposing a crippling burden on the next generation.
What’s wrong with this argument? For one thing, it involves a fundamental misunderstanding of what debt does to the economy.
Contrary to almost everything you read in the papers or see on TV, debt doesn’t directly make our nation poorer; it’s essentially money we owe to ourselves. Deficits would indirectly be making us poorer if they were either leading to big trade deficits, increasing our overseas borrowing, or crowding out investment, reducing future productive capacity. But they aren’t: Trade deficits are down, not up, while business investment has actually recovered fairly strongly from the slump. And the main reason businesses aren’t investing more is inadequate demand. They’re sitting on lots of cash, despite soaring profits, because there’s no reason to expand capacity when you aren’t selling enough to use the capacity you have. In fact, you can think of deficits mainly as a way to put some of that idle cash to use.
Yet there is, as I said, a lot of truth to the charge that we’re cheating our children. How? By neglecting public investment and failing to provide jobs.
You don’t have to be a civil engineer to realize that America needs more and better infrastructure, but the latest “report card” from the American Society of Civil Engineers — with its tally of deficient dams, bridges, and more, and its overall grade of D+ — still makes startling and depressing reading. And right now — with vast numbers of unemployed construction workers and vast amounts of cash sitting idle — would be a great time to rebuild our infrastructure. Yet public investment has actually plunged since the slump began.
Or what about investing in our young? We’re cutting back there, too, having laid off hundreds of thousands of school teachers and slashed the aid that used to make college affordable for children of less-affluent families.
Last but not least, think of the waste of human potential caused by high unemployment among younger Americans — for example, among recent college graduates who can’t start their careers and will probably never make up the lost ground.
And why are we shortchanging the future so dramatically and inexcusably? Blame the deficit scolds, who weep crocodile tears over the supposed burden of debt on the next generation, but whose constant inveighing against the risks of government borrowing, by undercutting political support for public investment and job creation, has done far more to cheat our children than deficits ever did.
Fiscal policy is, indeed, a moral issue, and we should be ashamed of what we’re doing to the next generation’s economic prospects. But our sin involves investing too little, not borrowing too much — and the deficit scolds, for all their claims to have our children’s interests at heart, are actually the bad guys in this story.
By: Paul Krugman, Op-Ed Columnist, The New York Times, March 28, 2013