Worst Part of the Deal? What's Not In It

by Jonathan Cohn | July 28, 2011

When it comes to the debt ceiling debate, we still don't know who will vote for what and when. But there's one thing we do know, with virtual certainty. When Congress does get around to passing a bill, it won't include efforts to boost the economy in the short term. And that is a travesty.

As you may recall, the Grand Bargain that President Obama was hashing out with House Speaker Boehner included an extension of unemployment insurance, a renewal of last year's payroll tax holiday, and some general language promising more funding for highways.

I was no great fan of that deal but I certainly appreciated that provision. Together, those changes would have pumped at least $160 billion into the economy, officials familiar with the negotiations have said. Very roughly, that would have translated to an additional 1.5 percentage points in gross domestic product and one million jobs, according to several economists I consulted.

But when the Grand Bargain fell apart those elements fell out of the deal. And just to make things worse, the new deals include spending cuts that will take place right away, something the Obama Administration and its allies were trying to avoid precisely because of its potential to weaken and already weak recovery. As Suzy Khimm, my former colleague who is now writing for the Washington Post, explained earlier this week:

“The problem is that aggregate demand is very weak from consumers and businesses. If government cuts spending in the near term, raises taxes in the near term, that would be a drag on growth,” says Gus Faucher, director of macroeconomics for Moody’s Analytics. He distinguishes “good” and “bad” deficit reduction: The good kind would reduce government spending when the economy is stronger, which would reduce long-term interest rates and free up more money for the private sector to spend and invest. By contrast, the bad kind of deficit reduction “would focus on cutting spending right now, while the economy is still weak.”
Similarly, authorities such as the International Monetary Fund have dismissed the idea that austerity measures would help an economy such as the United States’ in the short term, pointing out that few cases exist where sharp cuts led to fast growth in countries where employment was robust, interest rates were high (so the monetary authorities could compensate for the cuts), and exports were strong — conditions that don’t apply to the United States. More normally, they concluded, “a fiscal consolidation equal to 1 percent of GDP typically reduces GDP by about 0.5 percent within two years and raises the unemployment rate by about 0.3 percentage point.”

In theory, Obama, Reid, and their allies could try to restore unemployment insurance and payroll tax relief in the final negotiations, perhaps in exchange for some other concession. Or they could always start championing these ideas once the a debt ceiling deal, whatever its form, finally becomes law. Not only would that be good politics. It'd be good policy, too.

Source URL: http://www.newrepublic.com//blog/jonathan-cohn/92866/debt-deal-payroll-tax-unemployment-insurance-jobs-crisis