On Blogger Call, A Claim that Spending Cuts Would Hurt in March But Not October
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I was on this blogger conference call with Kenneth Baer from OMB and David Plouffe about the 2012 Obama budget. Michael Shear of the NYT interviewed someone on the call who described it as “mostly boring.” I didn’t think so, although I would say that of Shear’s article (“What do liberals on Twitter think of the Obama budget?”)
I asked a question, which you can listen to at C&L (I think about the 17:35 mark). My question was this: Where does the Administration think demand will come from to reverse a three-year demand shortfall if you cut budgets in the immediate term at a time when 14 million people are unemployed, if state budgets show the same contraction, if trade remains in imbalance and if corporations are sitting on $2 trillion in cash? In other words, do you think economy can generate its own demand right now? I added this for Plouffe to give it a political angle: The budget predicts 8.2% unemployment at the end of 2012. No President has ever run for re-election with unemployment over 7.8% since 1948. Do you think it’s worth cutting budgets over the next two years and reducing aggregate demand at a time when 14 million Americans are unemployed, if the political benefit appears to be facing re-election with the highest unemployment in recorded history?
So here was the answer. Plouffe said that the employment estimates, they hope are conservative. (Actually, one criticism of the budget I heard yesterday was that the projections were pretty aggressive and above what CBO projects for the next few years.) He said that there is a lot of positive trajectory in terms of job growth, though not nearly enough, he stressed. He said that the President has said repeatedly that we cannot jeopardize the recovery with the budget, and that it does not have negative effects on the economy in terms of hiring and growth.
I don’t know how he can say that. Simple math indicates that taking $90 billion out of the economy, which this does in the first fiscal year starting in October, would have negative effects. The positive trajectory on job growth, reflected by two consecutive months of reductions in the topline unemployment rate by 0.4%, have not carried with it actual hiring growth, and could be attributed to noise in the data and rejiggering of population statistics. So when you’re talking about actual job growth, not many economists see it yet. And sucking money out of the economy when states are contracting and businesses aren’t spending will necessarily reduce that hiring.
This is when Ken Baer stepped in. And his answer was baffling. He said that the President’s budget covered Fiscal Year 2012, which was “a bit away,” and that the budget was constructed so that the cuts wouldn’t go into effect until a little later. Republican cuts from the current budget year will start March 5 if they get their way, and there’s a risk there.
I mean, everyone had a lot of fun with Jeff Sessions yesterday talking about the budget, but is this any less nonsensical? Do you mean to tell me that spending cuts are risky in March but not in October? Exactly what is supposed to happen in those intervening seven months to change the game? Is there any serious economist who thinks that the jobs crisis will be over by this October, and that contractionary fiscal policy would therefore not harm the economy at that point?
About the only thing Baer could add to this is that the next two years will see expanded fiscal policy in two areas – the tax cut deal, which outside of an extra $60 billion for the payroll tax cut and whatever the business expensing provision leverages is mostly an extension of current law; and the National Infrastructure Bank proposal, which makes an up-front investment of $50 billion in infrastructure. That’s part of the proposed $556 billion highway bill in the budget.
Let’s take these one at a time. First of all, other small business measures that try to nudge them into spending have fallen pretty flat. In this 2012 budget, the Administration admits that the $30 billion small business lending fund passed last year won’t lend more than $17 billion, a little over half the total. One of the major reasons for the lack of pickup, to go back again to this, is the lack of demand for products in the economy. Businesses aren’t going to seek money unless it can pay off in sales. And that goes for expensing equipment too. So I’d be wary of any estimates there.
Second, the $50 front-loaded infrastructure bump would be very good stimulus. I’d love to see it put in place. But Democrats wouldn’t touch the proposal when it was offered last September, despite strong majorities in both chambers. And I see House Republicans want to provide half that amount or less of the Administration for the highway bill. I just see the chances of that passing as remote, though I strongly support it.
That $50 billion is doing a lot of work in the claim that this budget proposal does not have negative effects on the economy in terms of hiring and growth. And if it goes away, there’s nothing really in its place.
UPDATE: Forgot to mention that there’s another element in the budget that would be job-creating – a $250 one-time payment for seniors to make up for the fact that they’ve had no COLA increase for two years. However, this is yet another idea that a strongly Democratic Congress wasn’t able to pass last year.