Cliff Notes

July 31st, 2012 at 10:44 pm

As I’ve been distracted by other pending disasters, I’ve haven’t looked over the fiscal cliff for a while.   So, a few observations.

–Everyone knows the classic definition of the kid with Chutzpah: it’s the child who kills his parents and throws himself on the mercy of the court because he’s an orphan.

That’s what comes to mind when I hear the R’s complaining how they’ve been jammed on the automatic spending cuts, particularly regarding defense.  They jammed themselves, first by threatening default on the debt, which begat the Budget Control Act (widely supported by the R’s now caterwauling about it), which begat the supercommittee, which begat the sequester, evenly split between defense and non-defense.  Oh, and of course this is the same party that built the time bomb into the Bush tax cuts back in the early 2000s, which, with all of the above, begat the fiscal cliff.

So, yeah, for them to stomp around complaining about how the White House and D’s are jamming them with the fiscal cliff is extreme chutzpah.

All of this is well-covered in Jon Weismann’s NYT piece from this AM, who points out that “[m]uch of the fighting involves some short memories about how Washington reached this precipice.”

As his piece well-demonstrates, this is all getting played out in campaigns across the country, as well, of course, in the presidential contest, with R’s accusing D’s of pushing the economy over the cliff and cutting defense in order to extract a tax increase on the wealthy.

To their credit, D’s have been holding tough, recognizing that if they fold on this, any chance of new revenues in forthcoming fiscal deals will be toast.  Not only that, but all cuts will continue to be from not just domestic spending, but non-defense domestic—stuff like education and training (Pell grants, Head Start), veterans’ health benefits, investments in infrastructure and R&D.

But what impact will this battle of wills have on the economy?

–We at CBPP have stressed that if the trip down the fiscal slope next year is a short one, the economic damage could be minimized and a reasonable budget deal—one that includes new revenues that help offset or pushback the automatic cuts—could be quickly reached.  (Again, this only works if D’s and White House continue to hang tough.)

But what happens in the economy between now and then?  The WaPo reported today on firms like defense contractors sending out warning notices to their employees about pending layoffs due to the automatic cuts.

By law [the WARN Act], all but the smallest companies must notify their workforce at least 60 days in advance when they know of specific job cuts that are likely to happen.

Obama administration officials say that the threat of layoffs is overblown and that Republicans are playing up the possibility rather than trying to head it off. The Labor Department said Monday that it would be “inappropriate” for contractors to send out large-scale dismissal notices, because it is unclear whether the federal cuts will occur and how they would be carried out.

Republicans reacted with fury, saying it is the White House that is playing politics.

“The president is focused on preventing advance notice to American workers that their jobs are at risk and on perpetuating uncertainty,” said Rep. Howard P. “Buck” McKeon (R-Calif.), chairman of the House Armed Services Committee.

OK, deep breath needed here.  I’m old enough to remember quite vividly the fight over the WARN Act, which R’s viciously opposed (passed by a veto-proof majority, Reagan never even signed it).  To hear those guys invoke it is really more than I can take.  And btw, I thought R’s didn’t believe government spending created jobs…so how could spending cuts lead to layoffs?

But putting aside this deeply hypocritical BS, what are the economics here?  Will the sequester lead to job cuts—is it doing so already?

As I wrote a few weeks ago, citing Scott Lilly’s work—and Scott’s a former appropriator who knows of what he speaks—there are likely negative economic consequences already, based on the inability to reliably plan for upcoming production.

But on the other hand, Merrill Goozner makes compelling points here about how defense contractors are overplaying the job cut angle.  There’s a long time lag between budget authority and budget appropriations (decision about how much will be spent and the actual spending).  He writes: “Reduced authorizations precede reduced appropriations by several years, especially in defense procurement.”

Moreover, there’s not even a clean, positive correlation between defense budgets, production, and employment levels.  Goozner stresses that, in fact, contractors have been cutting employment for years:

…while spending on major weapons systems only recently began its post-Iraq and Afghanistan decline, employment at the largest firms in the [defense] industry began falling in 2009 or before. That is at least three years before the current round of budget cuts dictated by the Budget Control Act and long before concern about the impact of sequestration.

Look, OTEers know where I stand.  I’m already worried about a wobbly economy that was growing too slowly even before the recent downshift in GDP and jobs.  I consider the fiscal cliff a freakin’ disaster.  But I consider the full can kick that R’s are pushing for an even worse disaster, with dire long term consequences, not only for fiscal policy, but for any hope of returning to a day when compromise is once again a viable option.

And perhaps that day will get here in my lifetime.  Though you wouldn’t know it, and I don’t want to make too big a deal out of it yet, there are a few quiet, reasonable discussions going on between grown-ups away from the cameras and the campaign trails.  These discussions, which may well lead nowhere, are only happening because D’s haven’t caved.

So stay tuned and let’s see where this takes us.

Update: NYT editorial echoes many of these themes.

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4 comments in reply to "Cliff Notes"

  1. davesnyd says:

    Your penultimate paragraph would be more believable if there were evidence of adults in both (well, particularly one of the) caucuses. And that Ds knew how *not* to cave.

    One can hope…


  2. Chris G says:

    > Goozner stresses that, in fact, contractors have been cutting employment for years: “…while spending on major weapons systems only recently began its post-Iraq and Afghanistan decline, employment at the largest firms in the [defense] industry began falling in 2009 or before. That is at least three years before the current round of budget cuts dictated by the Budget Control Act and long before concern about the impact of sequestration.”

    Speaking as someone who works for a small defense contractor, the timeframe is shorter for smallish firms – a few hundred employees and below. Typical programs run a few years – two or three. Cuts usually affect work which would replace current programs when they expire. (It’s pretty unusual for an existing program to get terminated.) If new work doesn’t come in as anticipated then you can usually see ‘the cliff’ fairly far in advance – six months to a year. That said, it’s pretty tough to forecast more than a year in advance. Take anecotes for what they’re worth but I was watching my own cliff approaching for nearly a year and then just a couple months before ‘dropoff’ a new program came in which kept me going for six months and things stabilized – for awhile – during that period. Long term forecasting is difficult. (Not a deep statement but a truism worth repeating.)


  3. wendy beck says:

    This seems to be the MO of Republicans. They create a crisis, blame it on others and then profit by it. I see it everywhere — seems to be a strategy.


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