We have been tiptoeing around a number in the Biden debt limit talks, but Jon Kyl finally introduced some actual figures. We knew that Republicans wanted a dollar of deficit reduction for every dollar that the debt limit increased. To increase the debt limit until the end of next year, through the 2012 elections so that this hostage situation doesn’t take place again, would cost roughly $2.5 trillion. That’s the number Kyl, a member of the Biden talks, floated:
Minority Whip Jon Kyl (Ariz.) told reporters that Republicans want $2.5 trillion in budget savings in exchange for voting to raise the country’s $14.3 trillion borrowing limit through the end of next year.
“You’d have to do about $2.4 trillion in debt ceiling,” Kyl said, “which means you’d have to be about $2 1/2 trillion — at a minimum — in savings.”
Ryan Patmintra, a spokesman for Kyl, clarified later Tuesday that $2.5 trillion was a reference to the figure used in a debt-limit measure rejected by the House last week, not to any number being discussed in the talks led by Vice President Biden [...]
“If we can’t get, in this case, about $2 1/2 trillion in real savings, then I don’t think there would be much of an appetite on our side to raise the debt ceiling by $2.4 trillion,” he said.
So that’s not a number being used in the talks, but it’s the only number Republicans will agree to. That makes it a de facto target.
Let’s just do the math on this. The $2.5 trillion in deficit reduction may be able to be back-loaded somehow, so maybe I shouldn’t divy it up into perfect round numbers for each year. But I don’t see how you’d do it without some major impact on the 2012 budget that kicks in come October. For the sake of argument, let’s say it’s $200 billion in the near-term. Heck, let’s drop it down to $150 billion.
Well, that’s precisely the kind of sharp fiscal tightening that conservative Republican economist Ben Bernanke warned yesterday would choke off the economy. In fact, it’s 50% more than what Republicans demanded out of the 2011 budget. And it’s not the only fiscal tightening we’re going to see. State and local government cuts have contributed to a reduction of 300,000 public sector jobs over the past year, and layoffs will increase in the third quarter, as 2012 budgets in the states kick in. This is due to two factors: resets to property values reducing overall revenue, and federal stimulus measures running out, which becomes a drag on growth. Stimulus spending peaked sometime last year, and ever since, overall fiscal policy has turned negative. And, you have several tax-related measures, along with extended unemployment benefits, which end in December, and while President Obama wants them extended, it’s not clear he’ll be able to pull that off.
The less money spent at the public level, the less jobs in the public sector. Those laid-off workers cannot spend as much money as consumers or contribute to tax receipts. That weakened demand leads to more layoffs in the service sector. This is the downward spiral in which we’re caught.
It would be better if some of this went to revenue increases rather than spending cuts, especially to roll back corporate welfare that inevitably goes into cash reserves and sits there. But from a macroeconomic perspective, even closing bad loopholes contracts overall fiscal policy.