The latest budget crisis is over. The government is open at least through January 15 and can borrow to pay its bills at least through February 7. The problem, of course, is that the political dysfunction that produced the crisis persists. That's bad news for the economy and the budget.
The bad news comes in several forms.
First, if policymakers can't strike a deal to fund the government after January 16, we'd face another shutdown.
Second, if they can't strike a deal to raise the debt ceiling (or, better yet, eliminate it), we'd face another debt-ceiling crisis in late spring or early summer when the Treasury exhausts the "extraordinary measures" it can use to keep paying the government's bills beyond February 7 (when the new debt ceiling kicks in).
Third, the "continuing resolution" that keeps the government running through January 15 sets total funding for discretionary (non-entitlement) spending very low. The standard economic prescription for an economic recovery that's struggling to gain traction is a temporary increase in government purchases of goods and services – not the austerity that policymakers just enacted. That drag on the economic recovery is compounded by the uncertainty about whether we'll replay the crisis that we just endured.
Finally, as I've written here before, avoiding a government shutdown or default is only half the battle. The specific measures enacted to do so matter just as much. The Center on Budget and Policy Priorities estimates that in the past three years, the President and Congress have reduced projected deficits over the next ten years by $2.8 trillion, including interest savings, largely through cuts in discretionary spending. Of the policy changes achieved so far, the ratio of spending cuts to tax increases is more than 2 to 1. (These figures do not include the additional spending cuts that would come if sequestration remains in effect for a full decade.)
The economic forecasting firm Macroeconomic Advisers estimates that our lurching from crisis to crisis since the 2010 election and the policy choices we've made to resolve them have cost us up to a percentage point per year of slower economic growth and up to 2 million jobs. Paul Krugman makes a good case that the cost is even higher, because Macroeconomic Advisers did not include the premature termination of the temporary payroll tax cut as part of the fiscal cliff deal and the scaling back of federal emergency unemployment insurance in February 2012.
There's a sensible way to address the twin challenges of promoting a stronger recovery and putting the debt on a declining path relative to the size of the economy. The International Monetary Fund states it concisely here:
On the fiscal front, the deficit reduction in 2013 has been excessively rapid and ill-designed. In particular, the automatic spending cuts ("sequester") not only exert a heavy toll on growth in the short term, but the indiscriminate reductions in education, science, and infrastructure spending could also reduce medium-term potential growth. These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues, along the lines of the Administration's budget proposal. At the same time,…[a] slower pace of deficit reduction would help the recovery at a time when monetary policy has limited room to support it further.
Of course, a proposal "along the lines of the Administration's budget" or the Senate Democratic budget, which already represent significant compromises with key Democratic constituencies due to their proposed spending cuts, is anathema to Congressional Republicans because they include higher revenues and don't slash spending soon enough or deeply enough. What's the prospect for productive budget negotiations when one side offers a centrist proposal that's consistent with recent bipartisan budget proposals and the other side offers the much more radical plan of Budget Committee Chairman Paul Ryan, R-Wis.?
Unfortunately, the noted political analysts Thomas Mann and Norman Ornstein are probably right when they say: "A brighter future for politics and policy requires a different Republican Party, one no longer beholden to its hard right and willing to operate within the mainstream of American politics."
Chad Stone is chief economist at the Center on Budget and Policy Priorities.
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