A MANUFACTURED AUSTERITY CRISIS, NOT A FISCAL CLIFF

ABSTRACT: The so-called fiscal cliff you’ve been hearing so much about is actually a manufactured austerity crisis. There is widespread agreement that if nothing is changed by or relatively soon after December 31 that our economy is extremely likely to fall into a recession and unemployment is likely to increase to over 9%, an increase of between 1% and 1.5%.

The federal government’s deficit does need to be addressed, but doing so precipitously and in the wrong ways will hurt the economic recovery. The immediate problems are not the government deficit, but the lack of jobs, particularly middle class jobs, and the lack of consumer spending, which represents two-thirds of our economic activity. We should use strategies for addressing the deficit that minimize negative effects on jobs and the economy, and phase them in over time to reduce their impact on our weak economy.

 The austerity package bundles together a variety of measures that are largely unrelated. Addressing these complex issues individually and with time for thoughtful consideration would make more sense than doing so in a bundle under severe time constraints. The austerity package’s cuts to social programs would be 8.4% across the board, with a few programs exempted. These cuts would have very significant negative effects on low income families and on education.

FULL POST: The so-called fiscal cliff you’ve been hearing so much about is actually a manufactured austerity crisis. [1] Congress and the President agreed on this package of spending cuts and tax increases (which take effect on December 31) because the Republicans demanded it in exchange for their votes to increase the federal government’s debt cap back in August 2011. As you may remember, they pushed the government to the brink of default – which hurt its credit rating and the economy – in order to extract these austerity measures. (By the way, I believe this brinksmanship and the harm it caused is incredibly UNpatriotic; but that’s a separate discussion.) A Congressional “Super-committee” was created to find alternative ways to reduce the deficit but was unable to come to a consensus recommendation, so we are left with this “fiscal cliff.” However, the effects of the austerity package would occur over time, so it is actually more of a “slope” than a “cliff.” [2]

There is widespread agreement that if nothing is changed by or relatively soon after December 31 that our economy is extremely likely to fall into a recession and unemployment is likely to increase to over 9%, an increase of between 1% and 1.5%. The roughly $100 billion per year in spending cuts and $350 billion in annual tax increases would reduce the deficit from about $1 trillion per year to about $600 billion. But taking this $400 billion out of the country’s economic activity would almost certainly turn slow economic growth into a recession. (See my post, The “Fiscal Cliff” and the Economy of 9/19/12 for more details.) As we’ve seen in Europe, austerity measures have pushed Greece, Spain, and Britain into a recession and the whole Eurozone is teetering on the edge of recession.

The federal government’s deficit does need to be addressed, but doing so precipitously and in the wrong ways will hurt the economic recovery. The immediate problems are not the government deficit, but the lack of jobs, particularly middle class jobs, and the lack of consumer spending, which represents two-thirds of our economic activity. [3] In addressing the deficit, we should use strategies that minimize negative effects on jobs and the economy. (See my post, Addressing the Deficit on 9/29/12 for four specific policy changes that would eliminate the roughly $1 trillion per year deficit with minimal impact on jobs and the economy.) Furthermore, spending cuts and increased tax revenue should be phased in over time to reduce their impact on our weak economy. [4]

The austerity package bundles together a variety of measures that are largely unrelated other than they have some impact on the federal government’s revenue or spending; although some actually have no impact on the deficit. Therefore, some view this “fiscal cliff’ as more of a “fiscal obstacle course.” [5] Major changes to both the personal and corporate tax codes are included, as well as significant changes to spending on a wide range of government programs from defense to social programs. Addressing these complex issues individually and with time for thoughtful consideration would make more sense than doing so in a bundle under severe time constraints.

In addition to the expiration of the Bush tax cuts, which expire for all income levels in the austerity package, other benefits for middle and low income households are scheduled to expire as well. These include:

• Unemployment benefit extensions beyond the traditional 26 weeks (2 million individuals would lose benefits in December and another 1 million in April)
• The reduction in the Social Security and Medicare payroll tax (by 2% of pay, which puts about $1,000 a year in the average worker’s pocket)
• An enhancement to the Child Care Tax Credit
• The expansion of the Earned Income Tax Credit, which augments incomes of low income workers
• An exemption from income tax on mortgage debt that is forgiven

The austerity package’s spending cuts come 50% from the military and 50% from social programs. Many members of Congress oppose the cuts to the military. However, there are strong arguments for cutting military spending: 1) it has more than doubled (to $733 billion per year) since 2001, 2) we are winding down the wars in Iraq and Afghanistan, 3) we have far and away the largest military budget in the world, and 4) it’s widely acknowledged that there is significant waste in the military budget. Furthermore, military spending is not an efficient way to create jobs and at 58% of the federal government’s discretionary spending, it would be difficult and unfair to significantly reduce spending without cutting the military budget. (See posts of 9/29/12 and 11/17/11 for more details.)

The austerity package’s cuts to social programs would be 8.4% across the board, with a few programs exempted, such as Medicaid and the Children’s Health Insurance Program. These cuts would have very significant negative effects on low income families and on education. It is estimated that: [6]

• 75,000 3 and 4 year old, disadvantaged children would lose the enriched preschool services of Head Start;
• 25,000 young children would lose subsidies for early care and education (aka child care);
• 16,000 teachers and other school staff would lose their jobs;
• 460,000 students would lose special education services and 12,500 special education staff would lose their jobs;
• 20,000 youth would lose job training;
• 734,000 households would lose heating (or cooling) assistance;
• Community health centers would lose $55 million; and
• 1.3 million college students would lose tuition support.

If cuts to military spending are reduced, but overall spending reductions are maintained, cuts to social programs would be even more severe.

In my next two posts, I’ll discuss reducing the deficit through alternatives to the current austerity package, including reviewing various alternative proposals that have been put forth. I’ll focus first on options for increasing revenue and second on options for cutting spending.