Deficit extremists

The U.S. economy is improving, yet Congress seems still to be in the grip of the delirium that shrinking the deficit in the near term is still a matter of paramount urgency.

That’s what’s prevented lawmakers from dealing with their real task, which is to jolt the miserable jobs recovery into a higher gear and lift the budget sequester, one of the outstanding examples of mass insanity the country has ever seen.

Consider the sequester as exhibit A.

That’s the package of mandated budget cuts enacted as part of the deal to raise the debt limit in 2011. They were supposed to be so draconian that Republicans and Democrats would have to come to the negotiating table for a budget deal. That didn’t happen, so the cuts went into effect this year. They’re expected to pare anywhere from a half a percentage point to a full point from 2013 growth projections. Since projections for 2013 growth have been hovering in the 2 percent range, that’s real damage.

The federal deficit is down, spending is down, revenues are up, and the balance sheets of Social Security and Medicare are stable or improving. As a share of gross domestic product, the national debt is down too. In a rational world, this would be seen as providing breathing room to create job-creating programs of real value to the overall economy.

“This is the time to embark on a major boost in infrastructure investing,” observes Rep. Chris Van Hollen, D-Md., the ranking Democrat on the House Budget Committee-programs that could be funded with cheap debt, given that interest rates are near a historic low.

Austerity’s drag on the economy is visible in the jobs numbers. Since employment bottomed out in February 2010, just over a year into President Obama’s first term, the private sector has added an average of 214,000 non-farm jobs per month. But that’s been offset by consistent job losses in the public sector, which have totaled 854,000 jobs since the peaks at the three levels of government (March 2011 for the federal government and the summer of 2008 at the state and local levels). That’s the harvest of the inadequacy of federal stimulus and of the sequester.

Millions of Americans and their political representatives still talk as though the federal budget and the deficit are both still exploding. The numbers, as compiled by the Congressional Budget Office last month, disagree.

The federal budget deficit will shrink this year to $642 billion, its lowest level since 2008 and $200 billion smaller than what the CBO projected as recently as February. That deficit will be 4 percent of gross domestic product, less than half its ratio in 2009. Revenues will increase 15 percent this year, a third higher than the CBO expected in February. Spending is expected to be stable as a share of the economy at least through 2021, keeping in the range of 13.1 percent to 13.5 percent of GDP.

These figures indicate not merely that deficit fever has lasted too long in Washington, but that it may have been based on a misdiagnosis to begin with. The speed at which the CBO’s projections have changed over just a few months is a reminder that the major cause of deficit growth from 2008 through 2012 was the economic slump, which simultaneously reduced government revenues and necessitated a surge in government spending for unemployment relief and other stimulative programs. Recovery reversed both those trends naturally.

The latest projections on the deficit reduction are lower than they were in 2011 even without the sequester, observes Michael Linden, managing director for economic policy at the Center for American Progress.

“Those reductions the sequester was supposed to achieve we would have achieved even without it,” he says. “In a rational world, we would just get rid of it.”

That’s on the center’s wish list, embodied in a paper Linden released recently, proposing that Washington “hit the reset button” on the fiscal debate. The paper calls for enactment now of three Obama budget initiatives: a $20-billion down payment on the president’s early-childhood education program for five years, $50 billion in infrastructure development and $12 billion for the Pathways Back to Work Fund, which would provide employment assistance for the longterm unemployed and young and low-income workers.

Republican centrists like Kevin Hassett of the American Enterprise Institute are sounding similar notes.

Hassett has been the economic adviser to four Republican presidential campaigns including Mitt Romney’s. In April he told the Congressional Joint Economic Committee that the long-term unemployed (those jobless for more than six months) have become so numerous and faced such grim prospects that it was time to expand spending on jobs programs now. His proposals included direct hiring of the long-term unemployed into federal jobs, expansion of relocation assistance and tax incentives for firms that hire from this group.

No one at either end of the political spectrum is suggesting that we shouldn’t be concerned about the deficit in the long term. The error was in elevating deficit reduction to a near-term imperative. One reason for the ebbing of deficit fever may be that the dire consequences of austerity have become inescapable. That’s especially true in Europe, which hasn’t learned the lesson that cutting government spending during an economic contraction is a good way to turn a slump into a Slump with a capital S.