Tag Archives: deficit

The Sequestration Might Increase the Deficit

The most likely consequence of the sequestration will be be slower growth and lower tax revenues, and it’s a distinct possibility that the sequestration could actually increase the deficit. This week, the Supplemental Nutrition Assistance Program will face a $5 billion cut, which will likely slow economic growth further.

Repealing the sequestration economy could gain 1.6 million jobs and increase GDP by as much as 1.2% in FY 2014. A report by Macroeconomic Advisers, LLC finds that discretionary spending cuts since 2010 have reduced annual GDP growth by 0.7 percentage points since 2010 and raised the unemployment rate 0.8 percentage points, representing a cost of 1.2 million jobs. Goldman Sachs released the chart below in 2012 showing how federal policy since 2010 has been acting to slow growth.

The intellectual backing for tough austerity has been hammered this year. Recently, the IMF warned that private debt is slowing growth far more than government debt. Earlier this year a UMass-Amherst graduate student tried to replicate the results of the famous study by Carmen Reinhart and Kenneth Rogoff that purported to show how debt dragged on growth, he found it riddled with errors

Although the famous spreadsheet error (wherein RR failed to include cells in a calculation) made the biggest splash, the deeper error was a logical fallacy: Post hoc ergo propter hoc. Economists like Paul Krugman and Brad Delong argue that government debt doesn’t slow economic growth but rather slow economic growth causes the government to take on more debt. Research by Miles Kimball and Yichuan Wang find that this is the actual causation, so there is no evidence or logical reason to believe that reducing government debt right now will help the economy grow.

Britain provides an example of what could go wrong if the U.S. continues pushing austerity: austerity hobbled the economy and actually increased the UK’s debt as a % of GDP. Earlier this year, the CBO wrote:

According to CBO’s projections under current law, the contribution of automatic stabilizers to the federal budget deficit, measured as a share of potential GDP, will rise slightly in fiscal year 2013, to 2.5 percent. That contribution accounts for about half of the estimated deficit this year. The contribution will remain at 2.5 percent of potential GDP in 2014, accounting for roughly three-quarters of the projected deficit next year.

CBO expects that the budgetary effects of automatic stabilizers will remain large because of the continued weakness in the economy, which is caused in part by the fiscal tightening that is occurring in calendar year 2013 under current law.

Half of the deficit in 2013 this year is due to automatic stabilizers (the reduction in revenues and increase in spending that occurs when an economy enters a recession). If the economy was in full swing then, the deficit would immediately be halved.

Running deficits during a recession is one time when the government can have its cake and eat it too. Interest rates are low, so the cost of borrowing is negligible and the economic growth will eventually turn the deficits into surpluses, exactly what would have happened in the 2000s if there had been no tax cuts. In fact, the famous deficit-reduction of the Clinton era was due to economic growth, not policy.

The Worst Way to Cut the Deficit

Let’s accept the premise that U.S. federal debt is out of control and cannot be reined in by efficiency in the healthcare sector (an arguable premise). The way the government is cutting the deficit is the absolutely, objectively worst way the government could cut the deficit. The basic goal in the long-term would be to come at an agreement with modest entitlement cuts and modest revenue increases. Over time these would, with economic growth, get the debt as a percentage of GDP to the mythical 60% – 80%. The problem is that so far, nearly all the cuts are to discretionary spending (renewed every year) and are thus economically dangerous and don’t affect the long term-deficit:

Keep in mind that this is just deficit reduction on paper. The CBO doesn’t do dynamic scoring, (taking into account the effects the policies have on the economy), so all those discretionary cuts could end up disappearing if they hobble the economy and thereby reduce revenues.

What’s particularly startling about the cuts to discretionary spending is that discretionary spending includes all of the important public investments we make to promote growth in the future. The Financial Times reports that, “Public investment in the US has hit its lowest level since demobilisation after the second world war because of Republican success in stymieing President Barack Obama’s push for more spending on infrastructure, science and education.”

Public investment is crucial to future growth. The economic boom in the 50s and 60s relied on government investments in education (G.I. Bill), infrastructure (National Highway System) and science (NASA). Now, education spending is hurting at the state level, our infrastructure is crumbling in front of our eyes and scientific researchers worry about the fate of their projects.

 

Investments in science produce huge benefits, both in terms of well-being and economic growth. The Human Genome Project, for instance, cost 3.8 billion in public funding and has produced economic gains of $796 billion (that’s a return of $140 to $1). The internet, too, was a product of government research and has produced tens of trillions in economic output and growth.

 

Our infrastructure is aging, and the American Society of Civil Engineers estimates that we will need to invest around 3.6 trillion by 2020 to move from a D + to a B. Numerous studies find that infrastructure investment brings about large economic returns.

 

But worst of all, public investment is going to decrease even more in the future, the only question is how much:

This will seriously harm U.S. competitiveness in the future; public investment spending provides immediate stimulus and productivity growth in the future. A Demos/Century Foundation/EPI study estimates that if the U.S. had begun investing about $250 billion a year into infrastructure in 2011, GDP growth each year would be .1 percentage points higher in 2021 and .5 percentage points higher by 2025. By By 2045, nominal GDP would be by 11.6% higher than baseline projections.

 

A Quick Primer on Why The Debt Ceiling Debate is Absolutely Insane

House Republicans originally shut down the government to defund the Affordable Care Act (because the 46 votes to repeal it and numerous efforts to under fund it have already failed). Now, they want a debt-ceiling increase to be tied to a “grand bargain” to reduce the federal. Both of these developments give us insight into the actual goals of Republicans. They don’t want to cut the deficit; they want to shrink government down to the size where the can drown it in the bathtub. And their not going to let reason, empathy or constitutional procedure stop them.

Let’s start with the plan to defund Obamacare or shut down the government. The premise here is that the ACA will represent and unprecedented government takeover of a private institution (read that twice, it’s wrong on three counts). But the new story is that the ACA will cause the federal debt to spiral out of control. This argument is even worse.

Dean Baker and Peter Rosnick have shown that if U.S. healthcare costs were in line with healthcare costs of other developed countries the U.S. federal deficit as a percentage of GDP would decrease over the next 80 years.

Healthcare costs are the most important driver of the deficit, and the Affordable Care Act represents a significant step towards reigning in healthcare costs. This isn’t just liberal propaganda, it’s the assertion of non-partisan groups like The Urban Institute, Kaiser Family Foundation and CBO. Certainly the recession has played a large role in the slowdown in healthcare cost growth, but the Affordable Care Act is also responsible, only three years after being signed into law.

 All of this is happening despite the fact that Republicans have constantly worked to undermine the program by rejecting Medicaid expansion, underfunding the program and refusing to set up healthcare exchanges. Threatening to defund the ACA to get deficit reduction is akin to closing gyms to reduce obesity. But that’s the catch: the GOP isn’t trying to reduce deficits (“they don’t matter,” said Dick Cheney) they’re trying to reverse Obama’s signature legislation. In their war to destroy Obamacare, Republicans are shutting down the government, denying millions of poor people Medicaid and fomenting a constitutional crisis. But the debt-ceiling hostage negotiations are even more absurd.

Republicans are also holding the debt ceiling hostage in exchange for an insane list of demands (essentially the Romney/Ryan presidential platform). The idea here is to force Obama to tackle the “out of control deficits” that are, well, already falling at the fastest rate in 60 years.

But the entire idea is absurd prima facie. The reason that most economists worry about high levels of federal debt are three-fold: the threat of default, a risk of high interest rates and the need for distortionary taxes. But a default on the debt would instantly bring about all the negative consequences. A default would instantly increase the interest rates at which the U.S. can borrow in the future as well as bringing about another recession. A recession would only push the federal debt higher by reducing tax revenues and increasing the number of workers relying on the social safety net.

These observations can point to only one logical conclusion: Republicans aren’t actually worried about the deficit or debt. If they were, they would have accepted one of the many grand bargain offers that Obama put forward, one that would have reformed entitlements while raising revenues. But they’re not. Republicans are fighting an ideological war against government, the deficit is just a means to an end.