Reversing Austerity and Rolling Back Cuts – CPC Budget Part 2

Hey Everyone,

So the second part of this series will be focused on the next section within the Congressional Progressive Caucus’ budget which is entitled, “Reversing Harmful Cuts.” 

Now, this section is one in which the CPC deserves much commendation. They include a rare provision to actually repeal the Budget Control Act which was the piece of legislation that gave birth to what we know as the “sequester,” the across the board spending cuts that were automatically triggered when Congress failed to reach a deal on spending provisions; it was the second half of the proverbial fiscal cliff which included the across the board tax hikes that the Republicans were so concerned about.  

Now, before I go any further, I want to introduce a concept known as fiscal drag. It’s the effect of budget cuts or tax hikes (any austerity measures) on economic growth. Those measures, by increasing the amount people have to pay out of their pockets towards taxes or gutting essential economic programs which people depend on, do harm economic growth. Additionally, going off a Keynesian analysis, the deficit reductions also cut aggregate demand in a weak economy; the idea here is that when no businesses or individuals are willing to spend, the government (being the only financial entity capable of spending vast sums of money comparable to the private sector) should be the spender of last resort. These were the theories behind President Obama’s original stimulus plan. 

The problem is that no one can look at the economy and say its doing well. Consumer spending is still down, labor force participation has fallen to new lows, and the unemployment rate’s reductions have largely been based off those reductions as opposed to increased jobs growth. This is still the perfect opportunity for government to spend considering the extremely low interest rates. 

That’s why the sequester needs to go; discretionary spending is already at a terrible point as a percentage of GDP and the United States government has failed to provide for infrastructure investment, critical research, and adequate social safety measures. The sequester only set us back even further. Though I will note that certain bits and pieces of the sequester have been done away with in subsequent legislative deals (like the air traffic control measures). All of it should now be done away with. The CPC sites one particular example of $5.5 billion in cuts that were made to the Affordable Care Act’s preventative health budget alongside $450 million in cuts to the exchanges. One of the awful effects of Washington’s austerity climate is that the public discussion seems to have lost any focus on the economic benefits of the programs they so cavalierly suggest we slash. Preventative medicine actually saves the government money in long term expenditures (which is one of the things deficit hawks keep howling about in the first place); and let’s not even bother mentioning how much the ACA needed better implementation. 

In line with  that thinking, the budget restores funding to SNAP programs and unemployment compensation which actually do provide an almost immediate boost to economic growth as families will usually go out and spend this money on household essentials like food, clothing, gas, rent, etc. There’s absolutely no reason those programs can’t continue to last longer. There is however an argument made regarding dependency on those programs; the trouble  is that, absent other measures to address the shortfall in jobs that pay above minimum wage or clawback rates that turn work into an effective marginal tax hike on the poor, unemployment benefits and SNAP remain our only effective means to ensure that people don’t starve to death and still contribute money, as consumers, to the economy. 

There is one last critical policy to note. In the wake of the debt ceiling debates, the much demonized federal workers have been dealt pay freezes by budget deals since 2011. For the first time in a long time, the budget finally agrees to give Federal workers a raise again. These workers, for absolutely no legitimate reason, were the first ones targeted by cuts and giving them a raise ensures not only better living standards for them, but increased morale which correlates to better performance by our public servants. 

As if it hasn’t been made clear already, austerity is not my thing. I’m firm believer that deficits will decrease automatically as a result of economic growth increasing tax receipts and reducing welfare expenditure. It’s a proven record that kept U.S. deficits low for decades after World War II. But for that, the government actually has to invest in the economy. Reversing the cuts is a first step. However, my concern is that the tax changes brought on by the budget, while likely better for addressing income inequality, may bring too much of a drag too soon on the economy by raising rates too quickly. The concern comes from the budget’s initial stated commitment to lowering the deficit faster than either Paul Ryan or the President’s proposed budget. Even if the budget invokes good spending policies, if the deficit falls too low too fast, that will adversely impact the economy one way or another. 

We’ll have to wait and see. 

Chirag 

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