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The President's Budget: Continuing the Slow Climb Upward

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The president's budget proposal for FY 2013 recognizes some basic truths: we cannot speed up economic recovery without investments that create jobs and increase workers' readiness to do those jobs. And we must protect people from destitution when they are not able to work, both to reduce hardship and to prevent the economic damage that comes when millions of people are unable to pay for housing, food, and all the other things they need.

The budget sets up pivotal choices. The Obama administration calls for investments aimed at helping those with low or moderate incomes, paid for in large part by asking more of upper-income people, who are now being taxed at historically low levels. His opponents would preserve or increase tax breaks for people and corporations at the top, and would cut spending on services that help others lower down. Each claims that its approach will spur economic growth. Which approach is right?

We do have the evidence of 2000-2008 -- the years of the Bush II presidency. There were massive tax cuts that overwhelmingly favored upper income people. There was economic growth until the crash of 2008. But the rate of growth was the slowest since World War II. And it was not shared. In fact, median real wages declined from 1998 - 2007. In the 1990s, when top tax rates were higher and government policies were designed to expand opportunities, economic growth was five times the rate of the Bush years.

The Obama budget incorporates the administration's earlier deficit reduction proposals. It starts with the $1 billion in scheduled appropriations cuts over the next ten years as enacted in the Budget Control Act of 2011. It calls for $1.5 trillion in new revenues, targeted at those with the highest incomes and profitable corporations. It saves $850 billion because the wars in Iraq and Afghanistan are drawing to a close. It cuts spending in areas including Medicare, Medicaid, federal worker pensions, and farm subsidies by nearly $640 billion. The more balanced deficit reduction proposals in the budget would replace the automatic across-the-board spending cuts now required starting in 2013 under the Budget Control Act.

But because the economy is weak now, the Obama budget's new spending cuts (that is, the ones in addition to the cuts in appropriations already mandated) do not begin until 2014. In fact, there is a combination of increased spending and tax cuts in FY 2013 that leads to a slightly increased deficit. The only thing wrong with this approach is that it does not go far enough. The investments are not at the scale needed, although they offer important help. The alternative likely to be put forward by the House Budget Committee Chairman Ryan (R-WI) will not offer any help; it will instead cut back on investments and jack up tax breaks at the top.

The Obama budget calls for $350 billion in job growth measures, spread mostly between FY 2012 and FY 2015. These include $50 billion in road and transit maintenance and upgrading, $30 billion to modernize at least 35,000 schools and another $30 billion to hire and retain teachers and first responders, Project Rebuild, which will hire workers in low-income communities to "re-purpose" residential and commercial properties, and a new small business tax credit for companies that hire new workers. The new initiatives include Pathways Back to Work, a $12.5 billion project that will provide subsidized jobs and training for low-income, low-skilled workers and summer and year-round jobs and training for youth.

The budget makes investments in renewable energy and other forms of manufacturing that can contribute broadly to economic growth. But it also recognizes that economic assistance must be targeted where it is most needed: in communities where poverty and joblessness are high and opportunities are scarce. Across many different government programs, there are a set of investments that help poor children and families overcome deficits that pose very immediate threats to their economic security. Pending cuts to SNAP/food stamps would be prevented, to avert a loss of $60 a month for a family of four, and WIC nutrition funding keeps pace with demand. Continued or increased investments in early childhood education and child care are vital, as are increases in K-12 and higher education funding. Job training and placement funding increases for low-income youth and adults are urgently needed. (Existing Workforce Investment Act programs are more or less level-funded, but the proposed Pathways Back to Work funding provides an increase.) Parents will be helped through proposals to increase the child support they receive; fathers will get assistance so they are more likely to be able to pay child support and be a presence in their children's lives. Child care funding is increased to allow another 70,000 children to be served (for a total of 1.5 million children). Low-income families' purchasing power is shored up by continuing improvements in the Earned Income Tax Credit and Child Tax Credit.

Unfortunately, there are cuts in the budget affecting very low-income people that undermine some of the progress these investments are intended to spark. An unfortunate example is a new mandatory minimum rent for the poorest households in subsidized housing. Now, housing authorities can charge up to $50 as a minimum rent, although many do not ask that much when tenants have little or no cash income. The proposal would require a minimum monthly rent of $75. It doesn't sound like much, but it is if you are struggling with little or no income. The budget also cuts the Low Income Home Energy Assistance Program (LIHEAP) by $452 million (reducing the home heating or cooling assistance by more than a third below the FY 2011 level). According to the National Energy Assistance Directors' Association, one million households will lose help because of this cut (in FY 2009, 7.7 million households received LIHEAP help). Many elderly people need LIHEAP; in findings cited by an AARP report, nearly one-third of LIHEAP households including an elderly person reported going without medical or dental care because energy costs were so high. In addition, the administration once again proposes to slash the Community Services Block Grant, dropping it from $677 million in FY 2012 to $350 million. These funds support the 1,100 community action agencies which administer Head Start, LIHEAP, emergency food, job training, and other antipoverty programs nationwide. These agencies provided emergency assistance to 14.2 million people and helped 5.6 million people to get jobs or reduce or eliminate barriers to employment.

Because of a decade of capped appropriations as part of the deficit reduction legislation already passed, the administration is forced to make some cuts. If there are increases, such as new funding for child care or education, they must be paid for by deeper cuts elsewhere. That poses a real problem for the administration, but it does not mean that cuts that target the poorest people are the right choices. So far, Congress has not agreed to a dime of deficit reduction from revenue increases from upper income households or corporations. The $1.5 trillion in new revenues proposed in the Obama budget is long overdue, and does not exhaust the possible revenue increases available. It is certainly welcome that the administration raises the tax rate on capital gains from the current 15 percent to 20 percent for upper income taxpayers; that would raise about $36 billion over 10 years. But if capital gains were taxed at the same rate as ordinary income, many more billions would be raised. The administration is right to get rid of the very expensive cut to the estate tax that exempted estates of less than $5 million for individuals or $10 million for couples; by going back to exemptions of $3.5-$7 million, nearly $119 billion in additional revenues will be generated over 10 years. But still more billions could be saved by dropping the exemption lower. Such funds could reduce the deficit, allow for more needed job creation, and prevent inflicting higher rents or heating costs on the most vulnerable among us.

The president makes military savings, too; the base budget for the Pentagon (not counting war spending) is down about 1 percent over the previous year. Here too, many analysts believe deeper cuts are possible without sacrificing our national security.

As Congress gets to work on its own budget or deficit reduction proposals, we will see very different priorities. House Budget Chairman Ryan will likely slash Medicare, Medicaid, and SNAP/food stamps while providing even more generous tax cuts at the top. But there is evidence that such choices will hurt the economy and it is pretty plain that they will hurt people. The president's budget travels in the right direction, although at a slower pace than we need. It's a direction large majorities of Americans want to take. It would be nice if Congress could come along.