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Presidential Election Choices: Recession In 2013 Or Speeding Faster Toward National Insolvency

Posted: 06/14/2012 7:34 pm

Welcome to American politics, also known as the theater of the absurd. If we re-elect President Obama, we'll get deficit reductions, but also a recession in 2013. If we elect candidate Romney, we'll avoid the recession through increased deficit-spending, but we'll be on a path to national insolvency.

Let me explain these counter-intuitive conclusions.

In 2011, Congress passed and the president signed, as a bipartisan compromise, the Budget Control Act of 2011 (the Act). Under this Act (effective Jan. 1, 2013): Bush era tax cuts will expire, and Pentagon and other spending will decrease. The Act will cut America's budget deficit 40 percent in 2013, and begin to reduce National Debt as a percentage of GDP by 2015 (Source: CBO).

During this election year, the Republicans' claim they want to replace the Act with even more substantial deficit reductions, by large reductions in most of the social welfare programs. However, the Republicans also plan to extend Bush era tax cuts (and make even deeper tax cuts under Representative Ryan's tax plan), and increase the Pentagon's budget.

The Republicans haven't explained how they'll pay for these decreased revenues and increased expenses -- except to say they'll change other (unspecified) parts of the budget. It's not clear the Republicans' proposals are even serious since their numbers don't add up (they're short by anywhere between $4.6 to $6.2 trillion over the next 10 years).

If President Obama is re-elected and the Republicans retain even a blocking minority in the Senate (they're likely to retain control of both Houses), it's difficult to imagine Congress and President Obama reaching any compromise revisions to the Act between November 2012 and January 2013. So effective January 1, we'll be on the path to deficit reduction, and -- as Mitt Romney clearly understands -- reducing the budget deficit next year will trigger a recession:

"If you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5 percent. That is by definition throwing us into recession or depression. So I'm not going to do that, of course" -- Mitt Romney

If elected, Romney has committed to: Not cutting the deficit in his first year, extending and deepening the Bush tax cuts (particularly for upper income groups -- so-called job creators), and increasing Pentagon spending. A quick calculation shows Romney's first year in office resulting in a deficit at least $600 billion larger than under the likely Obama scenario. And perhaps as much as $1 trillion larger when Romney's new tax cuts and Pentagon budget increases are factored in. Romney's huge expansion of the Federal deficit would prevent a recession, might trigger another economic bubble, but at the risk of long-term national insolvency.

Romney would have little trouble getting his deficit-spending program approved by the Republican Congress. With a Republican president facing a possible recession, Congress will lose interest in deficit-reduction. As with prior Republican administrations, a Congress talking deficit-reduction pre-election, will post-election give tax cuts to the rich, budget increases to the Pentagon (rather than to the Veterans Administration) and spend like partying Secret Service agents in Cartagena.

Think I'm joking? Reagan, Bush 1 and Bush 2 all ran as fiscal conservatives -- claiming Democrats were the 'tax and spend' party. But these Republican administrations collectively tripled our National Debt from 30 percent of GDP -- to 90 percent, and increased Federal spending as a share of GDP (see Charts 1 and 2). Republicans then in Congress never objected.

So --

Liberals: Vote Romney because he's a committed Keynesian who will avoid a recession by deficit-spending. Romney's deficits will come from permanent tax cuts for the very rich (further, increasing income inequality) and permanent increases to an already-massive Pentagon budget (rather than investments in infrastructure, research and education that would build America's future). Also, Romney's budget plan will put us on a long-term path to insolvency.

Tea Party: Get out there and do everything you can to re-elect Obama! He's your best hope for an aggressive program to reduce the Federal deficit. Not because he wants to. Not because he agrees with you. But because gridlock in Washington will prevent any amendments of the Act's terms. And when the Act takes effect in 2013, we'll be on a path to long-term solvency -- but these reductions will involve tax increases (that the Tea Party doesn't want) and produce a recession (which no one wants).

Aren't American politics grand!

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About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2012. He has a Ph.D. in Management from Yale University, over 20 years' private sector work experience, and has worked in the Middle East in various capacities.

A version of this post first appeared at EconoMonitor and is reproduced with permission.

 

Follow Steven Strauss on Twitter: www.twitter.com/steven_strauss

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