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Jared Bernstein

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The Depressing Impact of a Spending Only Trigger (Update)

Posted: 07/31/11 09:28 PM ET

Update below

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 Republicans and 6 Democrats 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 further1.8 trillion in budget reductions. As Speaker Boehner's documents make clear, virtually all of the1.8 trillion would need to come from cuts in entitlement programs. (Cuts in entitlement spending totaling more than1.5 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 government 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.


****

Update: Again, quickly running down the deficit-reduction framework as it stands:

  • $1 trillion in cuts in discretionary spending over 10 years


What does that mean? It refers to the non-entitlements in the budget: defense and non-defense programs where dollar amounts are appropriated every year. On the non-defense side, it's transportation, education and training, child care, housing assistance, health research, energy.

From a jobs perspective, a lot of infrastructure and investment in stuff like clean energy comes out of this part of the budget.

  • A bipartisan committee (6 R's, 6 D's) must identify another1.5 trillion in cuts; entitlements and tax increases can be on the table, though Speaker Boehner claims his R's will not countenance any new revenues, and I'm prone to believe him. Assuming the committee agrees on the cuts, it reports out by Thanksgiving and their proposal gets a fast-track procedure--up or down vote by the end of the year.
  • But if the committee fails to report out or Congress won't enact their cuts, a spending-cut-only trigger kicks in, with cuts split 50/50 between domestic and defense spending. This sequester, as it's called, would exempt "Social Security, Medicaid, unemployment insurance, programs for low-income families, and civilian and military retirement. Likewise, any cuts to Medicare would be capped and limited to the provider side" according the White House.


Those are welcome exemptions, but man, I don't see how you get $1.2 trillion (that's the savings required if this part triggers) after you've already taken $1 trillion out of discretionary and still maintain those exemptions. I predict they'll be a lot of pressure to violate this part of the deal.

Now, here's a wrinkle a commenter asked about. Again, from the White House fact sheet: "If the Committee does not succeed in meaningful balanced deficit reduction with revenue-raising tax reform on the most well-off by the end of 2012, the president can use his veto pen to raise nearly $1 trillion from the most well-off by vetoing any extension of the Bush high income tax cuts."

Here, the White House is saying they have a fail-safe to get revenues in the deal. If the committee gets to the trigger stage without revenues, they'll go after the high-end Bush cuts.

OK, but those cuts were presumably going to sunset anyway, so on one hand, no new revenue there relative to what we expected. And what if the committee does come up with cuts (unlikely, but just sayin')...then does the administration punt on the high end sunset?

So it's no replacement for a balanced sequester, one that required both cuts and new revenues. On the other hand, given the tenor of the times, expected or not, it would be an accomplishment to finally see the sun set on those tax cuts.

The president spoke on the pending deal tonight, ending with this:

"[The deal allows us to] turn to important business of doing everything we can to create jobs, boost wages, and get this economy growing faster. That's what American people sent us to do and that's what we should focus on in months ahead."

I agree. It's about time.

But he also bragged that "these discretionary caps will put us on track to reduce non-defense discretionary spending to its lowest level [as a share of GDP] since Dwight Eisenhower was President."

Why is that a good thing? Why are 1950s levels (relative to GDP) of investment, infrastructure, and research in medicine and innovation so damn optimal?

And with all this incessant emphasis on deficit reduction, it's going to be extremely tough to convince people that we actually might need to spend some money right now, in the short run, to help get this economy out of neutral.

There's a lot of cognitive dissonance out there...stay tuned.

This post originally appeared at Jared Bernstein's On The Economy blog.