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Home Publications Op-Eds & Columns A Budget Deal That Does Nothing to Boost the Economy

A Budget Deal That Does Nothing to Boost the Economy

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Dean Baker
CNN, December 11, 2013

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The 2-year budget agreement crafted by Senator Patty Murray and Representative Paul Ryan can best be understood as a deal that is convenient for members of Congress. It is and pretty bad news for the rest of the country.

The convenience for members of Congress is straightforward. We have seen several dramatic standoffs over the budget and extensions of the debt ceiling since the Republicans took control of the House in 2010. This has led to one government shutdown and twice brought us to within a week of the point where the government might have had to default on its debt.

While these standoffs have been bad news for the country, especially the shutdown which meant services were not provided and workers were not paid, they were probably worse news for members of Congress. They had to spend many late nights haggling over deals. And their approval ratings tumbled in opinion polls.

In this way, the 2-year budget deal is good news for Congress since it means that it won’t have any major budget standoffs until at least 2015. This gets them at least through the election year.

The story for the rest of the country is not as good. First, it is important to note one of the items not included in the deal. There was no extension of unemployment benefits. As a result, more than 1 million laid off workers will see their benefits cut off in 2014. According to the Congressional Budget Office this will slow growth by 0.2 percentage points and reduce the number of jobs by around 300,000.

Of course Congress could still vote to extend benefits when it comes back in January. However even if this is the case, many unemployed workers will still up ending missing one or two checks.

While Congress did do some reshuffling of funds to make the sequester cuts less painful, one item on the reshuffling list deserves special attention. It is requiring that federal employers increase their contributions to their retirement, effectively cutting their pay by another 1.0 percent. This cut comes on top of pay freezes that effectively cut real wages by more than 5.0 percent over the last three years. Apparently, Congress has not yet tired of beating on air traffic controllers, food inspectors and other members of the federal work force.

But the biggest issue for most of the public is that this is a federal budget that will continue to impose a drag on the economy by preventing the sort of growth that we need to return to full employment. While the stimulus approved by Congress boosted growth and added between 2-3 million jobs, the steep deficit reduction of the last three years has slowed the economy, costing millions of jobs..

The basic point is straightforward. The economy still does not have a source of demand to replace the demand generated by the housing bubble. Bubble inflated house prices led to a new record pace of construction and a consumption boom as homeowners spent based on their illusory bubble-generated housing equity.

With the bubble gone, we are missing close to $1 trillion in annual demand in the economy. There is no mechanism in the private sector that will cause it to replace this demand on its own. Businesses don’t invest just because we profess love for job creators. They invest when they see demand, which is not the case in the current economy.

In the longer term we can hope to replace the bubble-generated demand of the last decade with more net exports. This would come about through a lower valued dollar that would make our goods more competitive internationally. However, we are not going to see a lower valued dollar tomorrow. This means that as a simple matter of logic the only way to replace the demand lost due to the collapse of the housing bubble is through the government.

But the budget deal negotiated by Murray and Ryan will do nothing to expand demand in the economy. They could have devoted funds to rebuilding the infrastructure, retrofitting homes and businesses to make them more energy efficient, and improving health care and education. Instead we see further cuts that will both lead to deteriorating service and fewer jobs.

This means that millions of people will continue to unemployed or underemployed for the foreseeable future and workers will lack the bargaining power to secure their share of economic growth. But at least the lives of members of Congress will be easier.

Happy holidays!


 

Dean Baker is the co-director of the Center for Economic and Policy Research. He is a co-author of "Getting Back to Full Employment: A Better Bargain for Working People." He also has a blog, Beat the Press, where he discusses the media's coverage of economic issues. Follow him on Twitter @deanbaker13.

 

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