To open our full employment event last week, Larry Summers presented an extremely compelling case for the importance of using fiscal policy to close our persistent output gaps, lower unemployment, and repair some of the economic damage resulting from “austerity,” i.e., reducing budget deficits in weak economies.
At the same time Larry was presenting this argument, two very different budgetary visions were introduced. Republican budget chairman Paul Ryan presented a vision highly inconsistent with Summer’s comments, and more consistent with austerity–a budget that cuts spending deeply and disinvests in human and physical capital.
On the other side of the aisle in the House we find the Congressional Progressive Caucus’s “Better Off Budget,” a vision much more consistent with the ideas laid out by Summers in terms of investing significant resources in the near term to both generate jobs and improve our productive infrastructure, followed by balanced deficit and debt reduction in the longer term.
I’ve already critiqued Mr. Ryan’s vision. Let me say a few brief words about the CPC’s vision.
First, broadly speaking, here’s what the budget does in the near term from an analysis of its projected impact by Joshua Smith of the Economic Policy Institute:
Accelerating and sustaining economic growth, promoting economic opportunity, and pushing back against the sharp rise in income inequality remain the most pressing economic challenges confronting policymakers. To directly address these issues, the Better Off Budget invests heavily in front-loaded job creation measures aimed not only at putting people back to work, but also at addressing the deficit in physical infrastructure and human capital investments. In stark contrast to the current austerity trajectory for fiscal policy—notably the expiration of emergency unemployment insurance, cuts to the Supplemental Nutrition Assistance Program (food stamps), and the continuation of discretionary spending caps and sequestration spending cuts—the Better Off Budget substantially increases near-term budget deficits to finance targeted stimulus, including infrastructure investment, aid to state and local governments, targeted tax credits, and public works programs. These types of investments would yield enormous returns—particularly by reducing long-run economic scarring that is resulting from underutilization of productive resources—and, as the name “Better Off Budget” implies, raise national income and living standards.
As Smith notes, the CPC plan would raise budget deficits relative to current law by over 2% of GDP right away, and almost another percent next year. But after that, their budget reduces deficits and debt levels below both current law and the President’s budget, largely through progressive taxation (see figures A&B here):
[From the CPC’s website]
- Returns to Clinton tax rates for households making over $250,000 and implements new brackets for those making over $1 million.
- Equalizes tax rates for investment income and income from a hard day’s work.
- Eliminates the ability of U.S. corporations to defer taxes on offshore profits.
- Enacts a Financial Transaction tax on various financial market transactions.
- Implements Chairman Dave Camp’s financial institution excise tax.
The likelihood that any of this is going to happen is tiny, though certainly the same could be said about much of Rep. Ryan’s budget as well. So why am I highlighting this plan?
In part, after all the ink spilled around the Ryan budget, to provide equal time for a progressive vision. But more so, because it’s useful to lay out such a vision—to articulate all of its moving parts—in order to see that it’s really quite simple.
To hear the rhetoric these days, you’d think faster job creation was impossible—we’re stuck with structural unemployment, depressed labor force participation, and weak wage growth. You’d think growth deficits and debt were inevitable unless we’re willing to sacrifice our social insurance programs and our safety net. You’d think investment in opportunity and mobility targeted at the least advantaged among us had to be sacrificed in order to achieve fiscal balance. You’d think we have to disinvest in our children today in order to save them from inheriting “mountains of debt” tomorrow.
We can stimulate faster growth—EPI’s modelling of the CPC’s plan says it will generate over four million jobs—protect and even expand vital programs, and get the national debt as a share of GDP on a solidly downward trajectory. No question, to achieve this means that both revenues and outlays will be higher at the end of the budget window than their historical averages; outlays would be about 2% of GDP above that average and receipts, about 3% higher. That’s not a trivial difference.
But it is one reasonable version of what it will take to achieve the goals of moving toward full employment in the near term, toward retirement security, poverty reduction, and adequate investment in the medium term, and toward significant debt reduction in the long term.
Take a look for yourself at these materials. They are neither shocking nor revolutionary. They’re merely an option—a smart and progressive one—to achieve a set of venerable goals. The fact that they’re so far out of the current mainstream to even warrant a decent hearing is far more a troubling sign of the times than a critique of the CPC’s efforts.