published Sunday, December 4th, 2011

Outlook for austerity

The silence the past 12 days over the failure of the congressional deficit-reduction supercommittee to meet its $1.2 trillion reduction mandate is apt commentary on Washington's deadlock. Since President Obama rightly promised to veto a Republican thrust to protect the Pentagon's bloated budget in the wake of the panel's failure, there's been no sign of bartering to preempt the mandatory across-the-board cuts that are now scheduled at the end of 2012 as a consequence of the panel's failure.

The looming question now is whether the specter of such an austerity budget -- and a more rapid pace of deficit reduction that either party had wanted -- augurs prosperity, as deficit hawks have proclaimed, or deeper austerity that would push the economy into another recession.

Before the panel's collapse, Democrats had already bent at least two-thirds of the way toward a so-called compromise. Their proposal offered a two-to-one margin of spending cuts over revenue increases on a "going big" $4 trillion deficit reduction package over 10 years

Republicans, in stark contrast, had yielded not a whit. They adamantly refused the proffered counter of closing corporate tax loopholes and rolling back high-end Bush tax cuts on annual incomes above $1 million that would fall on less than 1 percent of taxpayers -- the nation's megamillionaires and billionaires who got the lion's share of the tax-cut benefits.

The result of the deficit panel's failure may not be all bad, but it will broadly spread certain pain.

The mandatory spending cuts that will arrive at the end of 2012 may well accomplish far greater deficit reduction than Congress would ever have enacted voluntarily. It would do so through the combined effect of across-the-board spending cuts coupled with rising revenues due to the expiration of all the Bush tax cuts in 2012. The result, congressional budget analysts believe, would be a reduction in the annual budget deficit from the current $1.3 trillion to around $500 billion.

From that point, the predictions are trickier, and far more risky.

Rapid deficit reduction will clearly mean a corresponding reduction in the critical level of economic activity that is generated by government spending. Spending cuts, for example, would reduce federal outlays for unemployment insurance to families that circulate those dollars when they buy food, gas, clothes and pay their mortgage; for contracts for weapons systems and fighter jets that provide jobs to hundreds of thousands of Americans; for hefty federal matches to state and local governments for building roads, bridges and other infrastructure; and for a range of public health care services.

It doesn't take much of a reduction in federal spending to kick the economy in the pants.

Consider this example: Economists estimate that a congressional failure to renew President Obama's modest 2010 jobs and tax relief act would reduce economic growth by 1 percent in 2012. The bill extended unemployment benefits for 3.5 million out-of-work Americans and cut the Social Security payroll tax cut from 6.2 percent to 4.2 percent for 160 million American families in 2011, giving a family with a $50,000 income an extra $1,000.

That act cost $168 billion, not quite a fifth of the $800 billion in deficit reduction that the automatic cuts would impel in 2013.

But go with the loss, for a moment, of just the $168 billion in spending next year. The corresponding 1 percent drop in the growth rate would be huge. Due partly to this bill, economists are now forecasting a 3 percent growth rate in the last quarter of this year -- enough, finally, to pick up the nation's new hiring a notch. The 1 percent fall-back to a 2 percent growth would restore the anemic base-level margin of an economy barely able to keep up with new entrants in the job market. It would take a far larger stimulus to boost the growth rate to the 4 percent threshold that is needed to begin working down the hangover of 14 million left unemployed by the Great Recession of 2007, which the nation is just beginning to shake off.

Now, compare the cost, and corresponding loss of economic activity and growth rate, that would result from a deficit reduction in 2013 of around $800,000 billion. Analysts for Moody's, one of three big credit rating agencies which keep track of the nation's credit worthiness, warn that the impact of such a "historically extreme" reduction in the federal deficit could quickly push the economy back into recession. It's not hard to see why.

The economic and social issues that spring from this deficit-related dilemma will be the stuff of the 2012 presidential election campaign and all the congressional races. Neither Republicans nor Democrats want to see a return to recession, but the deficit, revenue and spending policies they tout will, to a great degree, bind the winning side.

Republicans will stick to their mantra of lower taxes on the rich and on corporations, and no new tax increases -- meaning a reinstatement of the unaffordable Bush tax cuts. Democrats, by contrast, will offer a more balanced approach to fiscal policy, and a slower, but healthier wind-down of the federal debt.

Voters need only to look around the corner, to the fall-out in 2013 of the rapid deficit-reduction model that Republican fiscal policy effectively promises to propel. If voters buy their pitch for extending tax cuts for zillionaire fat-cat "job creators" and loophole-happy corporations, the country's prospects could hardly be worse.

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conservative said...

So the strategy of the Demoncrats was - we want tax increases NOW in exchange for not spending as much as we would like to spend in the FUTURE. No real cuts, we spend more and our debt increases. BTW, those fairy tale cuts will come with a different Congress who are under no obligation to adhere to our deal. Yes, we know it won't fly, but we control the mess media and we must must keep our sheep ( sheep are dumb ) grazing on the government plantation.

December 4, 2011 at 10:07 a.m.
nucanuck said...

con-man, when did you first have this stupiphany that one party has all the answers and the other has all the evil?

December 5, 2011 at 1:04 a.m.
conservative said...

CONnuck--

There are only two things one can do with truth - either accept the truth or reject the truth. Truth can not be refuted. Therefore lieberals must change the subject, lie, attack the person, or invent a straw man argument. You seem to have hit the cycle.

December 5, 2011 at 9:38 a.m.
nucanuck said...

con-man, the truth can only be helpful when distinguished from the clutter.Neither political party has been shown to have a truth meter. Your pre-conceived political bias' precludes your potential ability to differentiate between battered truths.

December 5, 2011 at 10:19 a.m.
conservative said...

CONnuck--

Thanks for your help in making my point concerning lieberal tactics in rejecting truth. You did add a new strategy I had not noticed before - gibberish!

December 5, 2011 at 12:02 p.m.
nucanuck said...

If I aimed above your comprehension level, I apologize.

December 5, 2011 at 12:41 p.m.
conservative said...

CONnuck--

I guess that gibberish was an example of lieberal intelligence. Liberal intelligence! The oxymoron of the year!

December 5, 2011 at 3:51 p.m.
acerigger said...

nucanuck,,,DFTT!

December 5, 2011 at 7:18 p.m.
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