October 31, 2014

Washington Budget Report: May 15, 2012

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Selecting the Right Fiscal Policy

Recent news indicates the economy’s overall growth rate has slowed and is falling short of expectations, with slower personal spending and weak job gains. This points toward the need for stimulative fiscal policy to encourage more private consumption spending, according to Diane Lim Rogers, chief economist for The Concord Coalition.

The key question in determining the best fiscal policies, she writes in a new blog post, is what binding constraints are on the economy at a particular time.

In a recovering economy still below full-employment level, Rogers says, “fiscal policy can increase GDP by stimulating consumption -- either through the government’s direct purchases of goods and services, or through tax cuts or transfer payments that indirectly increase private spending.”

Temporary deficits in such situations may be justified. The effectiveness of such policies will largely depend on how well they are targeted towards households and businesses most likely to spend any additional funds.

In a fully-recovered, full-employment economy, however, the economy is constrained by the level of productive capacity. In that situation, increasing demand without increasing supply will only create inflationary pressures.

So as the economy gets closer to full employment, Rogers writes, “fiscal policy should transition from deficit-financed policies that encourage consumption, to paid-for policies that increase national saving.”

A recent analysis by the Congressional Budget Office of President Obama’s proposed budget underscores the distinction between the economy’s shorter-term and longer-term ailments. Rogers says the analysis also shows how higher deficits (relative to current law) would have different effects on these different ailments.   

“The latest economic news and the CBO analysis,” she writes, “serve as a reminder that any deficit reduction efforts over the next year need to be designed so as to not stifle personal consumption too much in the short term and yet substantially and credibly increase public saving over the longer term.”

In another recent development, the Department of the Treasury has reported that the government will record a surplus of $59 billion for April -- the first monthly surplus since September, 2008.   Last April Treasury reported a $40 billion deficit.

Read more with The Economy’s Ailments and the Best Fiscal Policy Prescriptions

House OKs Alternatives to “Automatic” Cuts

Last week the House passed legislation to replace most of the automatic spending cuts required in Fiscal Year 2013 with cuts to mandatory spending programs.  The Budget Control Act requires the automatic spending cuts because the Joint Select Committee on Deficit Reduction failed to reach agreement late last year.

The House legislation included proposals to cut food stamps and Medicaid, repeal portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and require federal employees to contribute more of their salaries to their retirement pensions.

The Congressional Budget Office estimated that the legislation would result in net deficit reduction of $237.8 billion over ten years if it were enacted by Oct. 1. The House approved the legislation with a vote of 218-199, though the Senate is not expected to pass it.  

Senate Majority Leader Harry Reid has criticized the House bill for failing to raise new revenue while cutting programs that benefit the middle class and the poor.

House Budget Committee Chairman Paul Ryan argues that the bill will avert defense cuts with reforms that stop the abuse of public assistance programs, restrain the growth of government, and eliminate waste and duplication.

The Concord Coalition has urged Congress not to abandon the automatic cuts without approving credible deficit-reduction alternatives.   

Also last week, the House passed the Commerce-Justice-Science appropriations bill, which is the first of the 2013 bills to pass the House.

Citizens Wrestle With Tough Budget Choices

Hundreds of concerned citizens across the country have engaged in thoughtful and often spirited discussions about federal budget options this month through Principles & Priorities, The Concord Coalition’s popular deficit-reduction exercise.

Working in groups of a half-dozen people or more, participants assume the role of a congressional committee to consider dozens of proposals in various parts of the federal budget that could either increase or decrease government borrowing.

In California, where the San Jose Mercury News co-hosted an exercise with Concord last Wednesday night, most groups reported that they had agreed on policies that would reduce projected deficits over the coming decade by more than $4 trillion, a frequently stated goal in Washington. In some cases, the San Jose groups sliced future deficits by $5 trillion or even $6 trillion.

All but one group agreed on a combination of spending cuts and revenue increases. Participants often disagreed with each other but generally found they were able to reach compromises that would still significantly reduce deficits.

Several people noted, however, that if they had really been members of Congress, they would have faced ferocious criticism from special interests for their decisions to raise taxes and rein in spending on everything from defense spending to entitlement programs. “We didn’t think we would lose the next election,” said one group chairman. “We thought we’d be recalled.”

Earlier this month Rep. Jim Himes (D-Conn.) and Rep. Gus Bilirakis (R-Fla.) each co-hosted events with Concord in their respective districts. Himes’ program was in Fairfield, Conn., and Bilirakis’ events were in Hudson and Trinity, Florida.

Himes was among the 38 House members who voted earlier this year for the Cooper-LaTourette budget plan, which is based on the work of the bipartisan fiscal commission that President Obama appointed in 2010. Concord has praised supporters of Cooper-LaTourette for their political courage and willingness to stand up special interests.

Himes expressed concern at the deficit-reduction exercise about whether Congress would be able to agree on significant deficit reduction later this year. But he said it had the capacity to do so “even in these polarized times.”

Bilirakis, who also co-hosted a Principles & Priorities exercise last fall, said such programs give taxpayers “an inside look” at the federal budget. “We must build a solid foundation for economic growth,” he said, “and that begins with improving our nation’s fiscal situation.”

Other deficit-reduction exercises were held this month with senior citizen groups in Atlanta and Roswell, Georgia.