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Cutting Spending, Slashing Recovery, and Burning the Middle Class

Andrew Fieldhouse – Federal Budget Policy Analyst, Economic Policy Institute Posted: 04/ 6/11 06:50 PM ET

Yesterday, House Budget Committee Chairman Paul Ryan (R.-Wisc.) released a budget resolution for next fiscal year that would slash federal spending by roughly $5.8 trillion over the next decade, while simultaneously cutting taxes by $4.2 trillion, relative to current law. Roughly $1.4 trillion would be stripped from Medicaid and the Children’s Health Insurance Program to finance regressive tax cuts. This proposed House Republican 2012 budget mirrors much of Ryan’s previously floated Roadmap for America’s Future, a plan to gradually eviscerate Social Security, Medicare, and Medicaid, while eliminating all investment and corporate income taxes. A conservative agenda of redistributing wealth from the poorest to the privileged has been unveiled for all to see.

In recent months, conservative legislators have paved the way for the Ryan budget with a litany of misguided proposals — all of which would place the entire burden of deficit reduction on spending cuts, with no thought given to the revenue side of the equation. As detailed in a new Economic Policy Institute briefing paper, Washington is adrift with economically misguided proposals to slash nondefense spending, slow job creation, and in some cases guarantee a double-dip recession.

When passed in February, the House Republican leadership budget would have cut $61.5 billion over the remaining months of this fiscal year; this reduction in government investment, transfers to states, and programmatic spending would cost roughly 600,000 jobs relative to the Congressional Budget Office January baseline, and roughly 800,000 jobs relative to the higher spending level requested in the president’s budget. These estimates are consistent with a variety of other estimates, including those from Moody’s Analytics and Goldman Sachs. But the February budget was just the opening salvo. Several even more draconian plans have since emerged.

First among these is the budget produced by the Republican Study Committee (RSC) that calls for even deeper spending cuts for the second half of this fiscal year and a rescission of stimulus funds that could cost upwards of 1.4 million jobs over the next year or two. The budget would then roll back the non-defense discretionary budget to its 2006 level (explicitly chosen because it’s the last appropriations cycle enacted by Republicans, despite having no economic bearing). It would then freeze the budget at that level for a decade, ignoring the current economic context of high unemployment, a growing population, and future inflation.

Next is Representative Michele Bachmann’s (R.-Minn.) plan, which would cut upwards of $430 billion over the next few years. Health care reform and financial regulatory reform would be repealed even though such actions would increase deficits, with repeal of health reform costing literally trillions in extra debt in coming decades. While it is difficult to estimate the savings that financial reform provides by helping to avoid another financial crisis, we do know that the old regulatory system’s failure cost the country 8.8 million jobs and $16.9 trillion in lost household wealth (measured peak to trough). And with respect to tax dollars, the financial crisis and economic downturn will have added roughly $1.7 trillion to budget deficits over the 2008-11 period (relative to pre-recession, full-employment forecasts).

As for Senator Rand Paul’s (R.-Kent.) budget, it would all but guarantee a double-dip recession by cutting $500 billion this fiscal year (which started last October). Immediate cuts of this magnitude would almost certainly throw the economy back into recession, and could increase the unemployment rate by as much as a couple of percentage points. Such cuts are particularly shortsighted: as much as half of the deficit reduction hoped for by these budget cuts would be lost as a result of a weakened economy and diminished tax revenues.

The Corker-McCaskill plan would ratchet down a spending cap, proposing cumulative cuts of $6.1 trillion by 2021 if current tax policies were continued. This would require a 24.6% across-the-board cut in all non-interest spending — including Medicare and Social Security benefits. Future government spending on promised benefits to an aging population would be slashed to an average of historical spending, again ignoring economic context and common sense.

Most recently, Senate Republican leadership also proposed a balanced budget amendment accompanied by a much lower overall spending cap, which would unrealistically constrain federal outlays to 18% of recent economic activity. Bruce Bartlett, formerly an advisor to President Reagan, characterized it as a plan that could have been “drafted by a couple of interns on the back of a napkin.”

These plans starkly contrast with last December’s bipartisan $858 billion tax deal — a deal in which the Democrats won more economic support (continuing unemployment insurance and cutting payroll taxes) and Republicans secured even bigger tax cuts for the wealthiest handful of families. The economy was in terrible shape, and bigger deficits were necessary to boost employment. While the politics have shifted, the labor market is still in terrible shape, and a willingness to run larger near-term deficits in order to invest in the economy remains the best policy lever to boost employment and strengthen the recovery.

Congress seems to be saying that deficits don’t matter when it comes to tax cuts, but deficits trump all when it comes to non-defense spending. This non sequitur poses grave risks to both economic recovery and the besieged middle class. Tax cuts and revenue losses from the recession account for roughly two-thirds of the expanded deficits since the start of the recession. Regressive tax cuts also created much of the structural deficit and debt that accumulated before the economy cratered. If Congress fails to curb wasteful tax giveaways (such as the extension of the Bush-era tax cuts for the richest families), the budget will be irresponsibly balanced on the backs of the poor, disadvantaged, and working Americans.

But as the Ryan budget resolution demonstrates, that is the conservative agenda.

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