A Few Final Thoughts on the Budget Deal

December 20th, 2013 at 3:14 pm

It’s not over—they still have to appropriate their new top-lines spending numbers down to all the agencies—but it looks like the budget deal that quite handily cleared both chambers will soon be enacted.

But I’ve got a few lingering thoughts about that I wanted to jot down.

First, why did they fail to extend UI benefits?  As I show here, the share of labor force that’s long-term unemployed is twice what it’s been in the past when Congress allowed extended benefits to expire.

Yes, there are Republicans who were against an extension on principle, but the word on the street was that Rep. Boehner asked D’s who supported the increase, “Well, where’s your offset?” meaning how were they going to pay for this $25 billion extension?

I’m sure that sounds like a reasonable question to a lot of people but not to me.  I’ve no objection to a backloaded “pay-for,” of course, but as I speak to in a moment, I can’t think of any that would be of that magnitude that could be agreed upon.

It’s an expense that could legitimately be added to the deficit.  Deficit reduction has occurred very quickly in recent years…too quickly.  Borrowing rates remain low, and while the economy and labor market are clearly on the mend, the gaps remain large, and it’s bad micro—UI beneficiaries need the money—and bad macro—they also spend the money—to allow extended UI to expire prematurely like this.

But it’s pretty unimaginable that anyone in government would suggest adding this expense to the deficit.  That’s a strong reminder that our misunderstanding of the dynamic role of budget deficits—the CDSH thing—remains terribly high.

Second, I believe we’re at the outer edge of the fiscal space-time continuum wherein we pay for things we need to do now without raising revenues, higher deficits, or entitlement cuts beyond the 2% cut to Medicare providers that’s part of sequestration (and was, in fact, extended for two more years, 2022-23, in the new budget deal).

Remember, one reason the Murray-Ryan deal passed was because appropriators, including House Republicans, could not appropriate to the spending caps established under sequestration.  They couldn’t squeeze their feet into those shoes, especially on the defense side—and the nondefense discretionary side is even more squeezed.

I’m not advocating for a grand bargain.  In my view, the fact that the deficit savings we’ve generated so far have been something like 80/20 spending cuts versus new revenues (when you count the sequester), and the fact that tax revenues remain historically low (remember, the fiscal cliff deal from late 2012 locked in 82% of the Bush tax cuts), suggest that’s where there needs to be some give in the system.

So one lesson we might take from the deal that just went down—and I’m glad to see some compromise, a budget, slightly diminished fiscal headwinds, and no shutdown—is that with neither higher deficits nor significant revenues anywhere near the table, our fiscal debates remain as cramped as ever.

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9 comments in reply to "A Few Final Thoughts on the Budget Deal"

  1. Perplexed says:

    David Cay Johnston has a quite a different take on the budget deal here: http://www.truthdig.com/avbooth/item/david_cay_johnston_budget_deal_makes_absolutely_no_sense_20131216?ln
    While we continue to lower the bar so as to see some evidence of success we continue to fall further behind. Are we really just “masking” “loser liberalism as Thomas Edsal suggests here: http://www.nytimes.com/2013/12/18/opinion/edsall-is-the-safety-net-just-masking-tape.html?hp&rref=opinion ?

    Possibly somewhat off topic for this post, but certainly related, I’m wondering if you had a chance to see this recent article by Mark Thoma:

    http://economistsview.typepad.com/economistsview/2013/12/if-social-insurance-didnt-redistribute-income-it-wouldnt-work.html#comment-6a00d83451b33869e2019b034bcc9f970d

    I thought he did a great job of explaining the “basic principles” behind insurance and how it works to spread risks that could be a disaster to one individual across a large number and thereby make everyone safer as they would now only be exposed to their “proportionate” share of the risk. Everyone takes a slightly less return in exchange for the whole group becoming safer and better off. I thought that his example showing how the group of 100 all gained in spite of the same number of defaults did a great job of explaining something that is somewhat counter-intuitive and a “nuance” that often gets lost in the political arguments over cuts to social programs (many of which are simply a form of insurance). I would quarrel a bit with the statement that “However, by pooling the loan default risk through a bank or other financial intermediary, the risk can be reduced substantially.” The overall “risk” is really the same (same # of defaults/100), its just now spread by the “insurance” of risk pooling so that all participants can take a “proportionate share” instead of each bearing the risk that theirs will be the defaulted loan, and that they would then absorb 100% of those losses. The actual mathematical implications of “we’re all this together” are quite compelling indeed.

    While reading it, I couldn’t help but wonder why economists ignore that what we are doing by denying access to the “producers” of labor (the 95%) the protections under anti-trust laws has exactly the same results, only in the reverse direction. It “insures” that those involved in the production of labor have no ability to pool their risk and therefore each “producer” must individually bear the risk and take all of the losses if “their number” is selected. The only real difference is that the investors in Mark’s example had a choice (even before risk pooling was available), they could choose not to invest at all, or to invest in an alternative, whereas those selling their labor have no choice but to play the game, there are no alternatives for most.

    Hoping to get Mark’s opinion on why this discrepancy exits, I posted the following request on his blog. I’d like to get your opinion on it as well if you might have some time in a future post to address it:

    “Next year is the 100th anniversary of the Clatyon Act, the Act that denies equal protection under anti trust laws to those whose “product” is “labor,” you know, the 95%. Obviously you’re quite busy, but, if you had the time, it would be great to see an article on how this same mathematical relationship works in exactly the opposite direction for those whose product is “labor.” By denying access to equal protection under the law to laborers, we can force them to bear individually the entire risk (to them) of output gaps and spare all of those left employed from having to bear even a small amount (their proportionate share) of this risk. This denies all of those producing labor from access to any “pooling of these risks” and makes them much easier to coerce as a group because they can all now be threatened with being thrown into the pool of victims, not by just the random probability of the event occurring, but instead by the choice of those with the power to coerce. With one “employment at will” decision, they can be chosen to bear the entire risk. It would also be great to know, space permitting of course, if you have any insights on why economists as a group would be in support of such as system and such market manipulations.”

    I do realize that many, many economists have made entire careers out of the study of unemployment and its effects and this could cause some unemployment as those resources are reallocated to more productive uses like how best to accomplish the “collection of premiums” and “distribution of loses” in such a system which would indeed be complicated (although, I’d suggest, not beyond their collective creative capacity) and might end up in increasing employment of economists on net.

    My contention is that, just like in the insurance example Thoma used, by “spreading the risk” across the entire pool, each individual would be be exposed only to his/her “proportiate” share and the entire group would be not only better off and more secure, but also much better able to withstand attempts at coercion. This too is counterintuitive; people oppose this due the fear that it would make them individually more vulnerable (due to price competition and lack of protection of their jobs) without realizing that by each bearing a “proportionate” share of the costs (premiums that would come in the form of price competition, reduction in hours or days worked, etc.), which would be small when divided over the entire group, the entire group is considerably better off. (The reduction in hours to the 90% gainfully employed would be minimal to fully employ the 10% who have been cast aside by the current system). So obviously the oligarchs and so called “job creators” would be opposed to losing their negotiating and coercion advantage, but I’d suggest that we need to have at least some confidence in their creative abilities as well; although those with the ability to function in an actual “free market” with a much reduced ability to coerce would obviously fare much better than the group as whole.

    I’d suggest that 100 years of this coercion is quite long enough. The practice is a rather obvious violation of the rights to equal protection guaranteed under the 14th Amendment and, if enough economists would support that its not only the Constitutionally sound thing to do, but also the “right & humane” thing to do, could come to an end quite quickly without any new legislation. After all, what really is the argument that the current practice results in equal protection? Or are we so distrustful of the “market” results that we really believe the suffering were imposing on the “few” (if you can really call almost 10% of the workforce “the few”) through tyranny of the majority is a better option than what we would have under “equal protection.” Business profits are at an all – time high, so there’s probably no better to time to implement the change because there would likely be some “transition costs” that businesses would be much more easily able to absorb at these profit levels. An alternative might be to have the government provide insurance (and collect the appropriate premiums) that would cover the actual losses imposed on the unemployed, but this would still leave “equal protection” and potential coercion unresolved and be subject to the same political manipulations the unemployed now face from those willing to avoid compensating them for losses imposed on them by the majority. It seems unnecessary to involve the government when an actual “free market” solution would accomplish better results and not be as prone to manipulation.

    At any rate, it would be great to hear your thoughts if you get any time to think through the implications.


    • Perplexed says:

      Sorry, the top link is to Thoma’s post about the article, the article itself is here:
      http://www.thefiscaltimes.com/Columns/2013/12/17/Social-Safety-Net-Redistributes-Income-s-Why-It-Works


    • Jared Bernstein says:

      “The actual mathematical implications of “we’re all this together” are quite compelling indeed.”

      That’s a neat point. You should develop it further.


      • Perplexed says:

        I’ll definitely give it a shot, probably quite a challenge to get it into a blog comment. I think Thoma’s example was extremely valuable in illustrating the point. Even though the same amount of money was lent, and the same defaults of the same magnitude occurred, there were no “losers” among the investors, all came out ahead. The risk adjusted benefit was substantially increased as each individual investor never faced the risk that they would have without the pooling. A small decrease in the expected value of earnings resulted an enormous risk-adjusted gain for all of the participants. This could not have been achieved without the pooling. Just like the all of those supplying labor cannot now avoid the risk as they are prevented from “pooling” the risk by the Clayton Act exception. Treble damages from being restricted access to the market would immediately force pooling of the risk as it would eliminate entirely the choice of imposing the losses on the few. All of the possible alternatives would involve pooling of the risk. That’s why Germany’s experience is so much better than ours is; the risk is pooled through job sharing and hour reductions. Seems obvious, as does the “equal protection” violation; hence the perplexity.


  2. The Raven says:

    Murray is one of my senators. I have been out of work for nearly a year, and my unemployment insurance extension will expire on my birthday.

    The Democrats didn’t even put a fight. If it had been the Republicans losing on one of their policy goals, we’d have heard about it 24×7 on the news. There would have been a filibuster and hostage-taking. Instead, the Democrats just rolled over, letting the Republicans avoid doing something that would cost them hugely in public standing and perhaps even votes.

    I now will only vote for Senator Murray if it is a close election and her opponent is toxic. Obama lost me with his failure on the mortgage disaster, and Murray has lost me with this.

    The contempt with which Democratic leaders must view their constituents in is astonishing. At least the Republicans acknowledge that we are hurting. The Democrats do not even do that. Of course they are losing the public.


    • Perplexed says:

      This is the effect of allowing the “Lestors” to pre-screen our choices. Its everyone’s responsibility to reclaim the republic:
      http://www.ted.com/talks/lawrence_lessig_we_the_people_and_the_republic_we_must_reclaim.html

      100% publicly financed elections cost exactly the same as elections controlled by the “Lestors” (no GDP effects whatsoever), and we can choose to tax whoever we want to pay for it. We are selling our control of the government and getting nothing in return but unemployment, inequality, unresponsive politicians and lack of investment in public infrastructure and services. As Dr. Lessig points out: this is the first thing if we’re at all serious about getting to the “important” things.


  3. The Raven says:

    A thought after that: no, it isn’t likely that the Democrats would have won a fight on unemployment. But at least make some noise. Show that you care, show that you are willing to fight, to take some losses for the people who vote you in.


  4. purple says:

    Quite a lot of Democrats, at least those in top ranks of the power structure, think the long term unemployed are lazy or looking for something too good. That’s really the reason they didn’t fight harder.

    Be thankful for that $8 assembling job we got back from China.


  5. George N. Wells says:

    Let’s get real. Budgets are weighted guesses projecting marvelous results a decade or more in the future based on a set of assumptions that we are not privy to read.

    Appropriations bills are a whole different matter and bear no relationship to the federal budget and are very short-term and based on a totally different set of assumptions. We already have legislators announcing that they will introduce appropriations to reverse all of the cuts called for in the budget. Making matters worse is that there is an entire off-budget universe of federal spending that is covered by appropriations.

    In the final analysis a budget is, at best, a political document making a political statement. Unfortunately, the budget gets more media attention than any of the upcoming appropriations bills will ever get. This is political theatre/comedy.


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