The Depressing Impact of a Spending Only Trigger

July 31st, 2011 at 3:58 pm

We’re not there yet but the contours of the budget deal that will raise the debt ceiling are coming into focus.

The White House has consistently sought three things in the deal:

–no default

–revenues to take pressure off of spending cuts

–not to be back in this debate until after 2012.

It’s looking like they’ll get one and three.  Both are very important.

But so is two.  As I and others have written from the beginning of this debacle, absent new revenues, we’ll end up with spending cuts carrying too much of the load.  And that looks to be where we’re headed.

As I understand it, the first tranche of cuts—about $1 trillion in discretionary spending—occurs soon after passage.

Then, by the end of this year, a committee of 6 R’s and 6 D’s comes up with a proposal for about $2 trillion in round two cuts.  If the committee fails to do so, or Congress fails to enact, then an across-the-board spending-cut-only trigger takes over.

Especially after the first round of cuts went exclusively at discretionary programs, this means round two will go hard after entitlements.

That sounds a lot like what Speaker Boehner proposed last week.  Here’s what my CBPP colleague Bob Greenstein had to say about that proposal :

  • The first round of cuts under the Boehner plan would hit discretionary programs hard through austere discretionary caps that Congress will struggle to meet; discretionary cuts thus will largely or entirely be off the table when it comes to achieving the further $1.8 trillion in budget reductions.  As Speaker Boehner’s documents make clear, virtually all of the $1.8 trillion would need to come from cuts in entitlement programs.  (Cuts in entitlement spending totaling more than $1.5 trillion would produce sufficient interest savings to achieve $1.8 trillion in total savings.)
  • To secure $1.5 trillion in entitlement savings over the next ten years would require draconian policy changes.  Policymakers would essentially have three choices:  1) cut Social Security and Medicare benefits heavily for current retirees, something that all budget plans from both parties…have ruled out; 2) repeal the Affordable Care Act’s coverage expansions while retaining its measures that cut Medicare payments and raise tax revenues, even though Republicans seek to repeal many of those measures as well; or 3) eviscerate the safety net for low-income children, parents, senior citizens, and people with disabilities.  There is no other plausible way to get $1.5 trillion in entitlement cuts in the next ten years.

If it’s true that the trigger in the deal is spending-only, no revenues, then the American people are about to end up with a very tough deal indeed.

I’m already hearing a lot of blame cast toward the President as per this outcome.  I’ll speak to that later—right now I have to go weed the back yard in 97 degree heat, which I actually find way preferable to dealing with the debt ceiling.

But for now, let me say this: it is not the President who brought us to this spot.  It is the actions of a group of far-right conservatives who were and are ready to push America into default for the first time in our history.  Their actions would force the gov’t into prioritizing payments and sharply increase the likelihood of our already frail economy becoming even worse.

President Obama would not go there.  We may have honest disagreements about that choice, but it’s a choice the President was not willing to make, and that has made all the difference.

 

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27 comments in reply to "The Depressing Impact of a Spending Only Trigger"

  1. Ron E. says:

    The GOP chose to try to take the debt limit hostage, true. But Obama chose to let them do it by taking the 14th amendment and platinum coin options off the table. If he had said, “Pass a clean debt ceiling increase or I’ll use the 14th amendment. We can negotiate spending and taxes as part of the normal appropriations process,” then things would have gone differently.


  2. Alvord says:

    Obama is a weak President who is on the verge of institutionalizing the use of the debt limit as a weapon. From now on Republicans will routinely use it to get what they want. Just look at what they have done with the filibuster in the senate. It used to be rare and now it is necessary to get 60 votes for anything.

    I regret having voted for Obama even if Sarah Palin would be Vice President.


  3. janinsanfran says:

    It is not the President who brought us to this spot, but Obama was elected to use the power of Presidency to prevent us from ever coming to this spot (screwed in the interest of rightwing billionaires) and he has failed the people who elected him.


  4. JimZ. says:

    Jared, I really appreciate your column and all of the work that you do, but to date I’ve seen not one iota of evidence that “it’s a choice the President was not willing to make…”. Since his primary campaign, he has obviously been out to cut Social Security (Hillary Clinton had to correct his misstatements about S.S. then he went silent on the topic till his election), and not work on our behalf. I place far more blame on Obama than on the GOP. At least the latter have always been against the nation’s safety net, the middle class, etc. But Obama pretended to be for regular Americans. He has cleverly guided the debate into right-wing territory and then thrown up his hands and said that he had no choice. This has happened on every major policy issue during hios tenure, and here we are again. His is a shockingly failed presidency.


    • Robert says:

      Jim Z,

      I couldn’t agree with you more. Time and again this president has revealed to us his true colors. He has repeatedly taken policy positions hostile to his Democratic and Independent base that voted for him in 2008. From bankster bailouts to shielding the mortgage industry from prosecution, from continuing to oversee the offshoring of American jobs while failing to pursue actions to spur job growth, this administration has been adverse to American social justice and economic prosperity for all.

      Thanks for pointing out the political deception Obama has successfully orchestrated over the debt limit issue to once again sell out his debased base.


  5. Th says:

    Obama negotiated with terrorists. It is his fault.


  6. foosion says:

    What do you think of this estimate:

    Debt ceiling vote cuts spending $2.4 T for 10 years or $240 billion/year

    Fed spending is $15 T

    240/15,000 ~1.5%

    That should depress GDP by 1.5% – 2.0% (e.g., Roemer in July 3 NYTimes says 1% cut => 1.5% GDP)

    That should decrease employment 0.5% – 0.7% (Okun’s law)

    Current employment is 150 million

    So spending cuts result in losing 750,000 to 1 million jobs

    While we’re blaming Obama, he could have avoided this when agreeing to the Bush tax cut extension:
    http://krugman.blogs.nytimes.com/2011/07/31/tax-cut-memories/


    • Fargus says:

      foosion,

      I’m not sure of all the formulas you’re using, but federal spending is somewhere closer to $3.5T. It’s the entire GDP that’s $15T.


    • Jared Bernstein says:

      You mean GDP is 15t. Fortunately, the cuts are quite backloaded, at least the discretionary cuts–about 25bn yr 1 and 50bn year two in both Boehner and Reid, though who knows what these wizards will brew up over the next few hours/days.

      Still, you’re point is well taken. Note that I left the mandatory cuts out of the above yrs 1 and 2 cuts, because we don’t know what they’ll be. But if they really have to cut something 1.5t from entitlements over 10 yrs, we could be looking at serious fiscal drag. Especially since that’s disposable income to people–ie, they spend it.


      • foosion says:

        GDP is $15 T, of course.

        Backloading helps. I hadn’t seen that in any of the published reports.

        Do you think the ratios are about right – cut spending by 1% of GDP loses about 1.0% – 1.5% of GDP, and losing 1% of GDP loses about 0.3% of employment?

        thank you


        • Jared Bernstein says:

          CBO has spending details.

          Agree re magnitude of contractionary effect when we’re so far from full employment. And right now, 1% of less GDP would be more like 0.7% of employment, I’d think…like around 1m jobs.


        • foosion says:

          I hadn’t seen backloading in any of the reports on the current bills. It was in earlier iterations.


  7. D. C. Sessions says:

    The lovely thing about this from the Republican perspective is that the threatened consequences of failing to meet the round two objectives are pretty much the Republican wish list anyway — they can get them by default.

    Which, in turn, means that they can not only put a knife into Social Security, but that the fingerprints will be blue.


  8. sad dem says:

    It’s not the president who brought us to these cuts? The buck stops here, all trillions of them. All he would have to say is no, or do any number of other constitutional tricks worst case have it in the courts for years.

    Wasn’t he the one who on every issue has planted his position squarely to the right of the middle to show good faith? Then at the first sign of controversy rush to the right as to prove to that small group of independents that he is a compromiser.

    Isn’t this the admin who says don’t worry about the left, you know come election time they have nowhere else to go, they will vote for us.

    He is the one who told us, we have to make cuts, I will take a lot of heat from my party. But this will make him look like the quintissential statesman, cutting bigger amounts from the budget than the Republicans were ever able to cut.

    It is not Obamas fault we went through this six months ago, and he didn’t even put together an agreement to hold it for the rest of the term. Give away half the store six months ago, today lets tear out the fixtures.

    The pathetic part is, no matter how terrible of a President GW Bush was, is there any doubt in anyones mind, that if he were in Obama’s shoes, he would have got everything he wanted. Obama got squat.

    Majority of REPUBLICANs as well as dems wanted tax hikes, Obama couldn’t even deliver on that.

    Let’s not blame OBama though, as President, he is above all that, his job is not to lead, his only duty is to keep the middle ground through these tough negotiations and to insure that the Majority TeaParty caucus gets everything they want.

    Imagine when the economy is in the tank in two years, do you think the Republicans will be taking credit for that?


  9. Travis says:

    I don’t know what to think about Obama. I have to agree with Bruce Bartlett on this, though. Obama has governed more like a moderate Conservative than a liberal. Maybe his plan here is to hopefully let the Bush Tax Cuts expire (while praying that the economy has recovered enough so that the lower and middle classes can take the hit) even if he doesn’t win reelection. Frank Rich’s article in New York Magazine does a great job of outlining how Obama got himself into this mess. My hope here is that once people realize and feel the pain from just how crazy the Republican party has become, they will swing things back in favor of people are sane and who want more revenues. Otherwise here we come 21st Century Depression.


  10. David R says:

    Why, why is anyone surprised by this. Revenues were never on the table, never ever. Here is what was written June 24

    “Republicans Propose Bi-Partisan Plan to Cut Deficit, Bi-Partisan Meaning Republican Get Spending Cuts They Want, No Tax Increases on Wealthy Americans and Democrats Get Blamed for Cutting Vital Programs.”

    http://dismalpoliticaleconomist.blogspot.com/2011/06/republicans-propose-bi-partisan-plan-to.html

    And now people are saying that Mr. Obama will use his leverage that he can veto extension of the Bush tax cuts in December 2012 to force tax increases from tax reform. Of course this assumes he is President on Jan. 21, 2013, at which time if he is not the tax cuts for everyone will be made permament. And does anyone really believe him anymore on fiscal matters, anyone?


  11. Michael says:

    Hope: still not a plan.


  12. Dreamer says:

    I think the key issue here is that the Republicans rely electorally on demonising the opposition, making socialist/progressive/liberal dirty words. So when they are faced with a centre-right president of the opposite party things go haywire… just like they did under Clinton, and they are now.

    When the guy across the table lays out starting positions that they may have suggested themselves, a man which they’ve spent so much energy turning portraying as some sort of monster, I would argue that it doesn’t leave them much room to maneuver except further right in order to avoid acknowledging their own cognitive dissonance.

    Obama didn’t bring us to this spot, though one may question if he should’ve (if he even wanted to) play his cards better during the last time this happen to avoid it. However, I think he shares blame for how bad the fallout is going to be both politically and economically.



  13. Jim Gonyea says:

    Obama is the worst negotiator in the world. I wouldn’t want him in the room next time I buy a car. Assuming I have a job and can afford a loan next time I need a car which at this point I believe is an open question.

    As you wrote he went into this with three negotiating points. And he comes out with one. The one he comes out with is the one the Republicans agreed to before the negotiations started. Either it’s an unmitigated failure on the behalf of the President or this outcome is what he wanted all along. Since I’m not in the White House I would assume that Obama has completely failed. I’m going to take him at his word from the campaign that he’s a progressive Democrat which leaves me to believe he’s just a failure as a President. For all intents and purposes Speaker Boehner is in charge of the country.

    I wish someone would challenge Obama for the Democratic nomination because he doesn’t deserve a clear shot at the nomination. Yes we can was a nice slogan, but it’s become totally apparant that the real slog is no we can’t.


  14. Geoff Freedman says:

    The saddest part of all this is we really don’t have an entitlement problem. What we have is a fundamental imbalance between spending and revenue that goes way beyond entitlements. There was a good explanation of this in an article by William Gale of Brookings ‘Five Myths about the Bush Tax Cuts’.

    http://www.washingtonpost.com/wp-dyn/content/article/2010/07/30/AR2010073002671.html/

    Social security is really self supporting via wage taxes (currently). 2010 was the first year it ran a deficit since 1983 (Regan’s reforms od Social Security). Over $4 trillion of our debt was borrowed from Social Security and Federal Pension Funds. I know there were resolutions passed so the government could do this, but if a private company did this with their pension funds the people involved would be charged with embezzlement.

    Medicare is a problem, but the real problem is our underlying health care system, which is structurally compromised and broken. We spend 2.5 times what most other developed countries spend on health care, but none of thoses other countries have an employer based fee for services system. We can cut Medicare all we want, but unless we fix our broken health care system, health care costs will continue to spiral out of countrol and probably by itself bankrupt us anyway.

    But here’s to the budget cuts, higher unemployment, and a further erosion of our GDP, while not really addressing the real spending and revenue problems we have.

    I too am losing faith in Obama’s leadership.


  15. jr says:

    Jared – Thank you for this. Some folks are close to the WH are saying that the because the trigger happens at the same time as the expiration of the Bush tax cuts (1/1/13) then for all intents and purposes, there’s a revenue trigger too. Curious what you think of that line of argument.


  16. AndrewBW says:

    Regardless of whether you slap 110% of the blame for this debacle on “far-right conservatives who were and are ready to push America into default for the first time in our history,” the fact remains that from the very beginning of this debate President Obama has staked out a position far to the right of any that I consider honest, sensible, and productive.

    I agree with Bruce Bartlett that Obama has governed like a moderate Republican. Don’t get me wrong, I’m not a raging left-wing radical. I’m willing to negotiate with moderate Republicans. But the President has to be willing to negotiate with me too, and he’s just not. He’s only willing to negotiate with the far right. So come the 2012 elections I get to choose between a moderate Republican and an insane Republican?

    Thanks – for nothing.


  17. rover27 says:

    The real sad thing is that the deficit and debt are not the main concern of the American people. It’s jobs and gas prices.


  18. Misaki says:

    It’s true that a sharp cut in spending, ceteris paribus, will make things more difficult for some subset of the population.

    Those two words are important.


  19. Greg says:

    “But for now, let me say this: it is not the President who brought us to this spot. It is the actions of a group of far-right conservatives who were and are ready to push America into default for the first time in our history.”

    This is outrageous nonsense, Jared. Every leader faces opposition. The President had several alternative courses of action available to him, and used none of them.

    President Obama has failed the people of the United States of America, although he may have got what *he* wanted.


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