House Republicans cling to false promise of austerity in their budget resolution

This week, the House Budget Committee reported out, on a party-line vote, their fiscal year 2017 budget resolution. Infighting between House Republicans, centered on the idea that proposed spending cuts should be even more drastic, suggests that this year’s budget resolution is unlikely to pass. However, with all the media attention focused on the House Republican’s inability to come to an agreement, we shouldn’t lose sight of just how austere their budget resolution already is, and how much damage the cuts it calls for would do to the economy over both the short and long run.

For example, the cuts over the first two years would impose a significantly larger fiscal drag on economic recovery than previous Republican budgets. It’s true that the economy is healthier than it’s been in previous years, and the Federal Reserve may have more scope to neutralize fiscal drag than in years past, so it’s possible (if not likely) that job growth may be able to absorb some of this fiscal drag beyond 2017. Because of this possibility, we have departed from previous years’ practice in specifying a point estimate on how much this budget will affect economic growth and job creation in years beyond 2017. However, the evidence is still overwhelming that rapid spending cuts would be deeply damaging to a still-weak economy, and we can be pretty concrete about this over the next year.

GOP House budget resolutions for the past several years have been obsessed with eliminating the budget deficit by the end of the ten year budget window. This was already a quixotic and damaging goal, and it has become even more so thanks to changes in the CBO’s baseline. And while deficits are created from revenue minus spending, congressional Republicans’ outright refusal to raise any taxes means that spending cuts—and thereby low- and middle- income people—must bear the entire brunt of the budget resolution’s burden. They bear this burden to the tune of $6.5 trillion in spending cuts to vital programs over ten years—programs that overwhelmingly serve those most in need. The cuts would take away affordable health insurance coverage from the millions that have gained it under the Affordable Care Act and then further erode the safety net with cuts to Medicaid, unemployment benefits, and nutrition assistance. Besides making the economic lives of vulnerable populations harder, focusing cuts on this group imposes a large fiscal drag, since these are households that tend to spend (not save) additional dollars of resources back into the economy.

This fiscal drag will measurably impact economic growth and job creation. Almost seven years after the official end of Great Recession, significant slack in the labor market remains. This is evidenced by, for instance, a jobs gap of 2 million (a gap which persistently remains due in large part to the austerity measures enacted since the Budget Control Act of 2011). While the Federal Reserve has raised interest rates slightly, there is still very little scope for monetary policy to offset a sharp fiscal drag in the next year, and the House GOP budget resolution would continue to drag on growth and postpone a full recovery. By our estimates, the spending cuts in fiscal 2017 of the House GOP budget resolution would reduce GDP by about 1.2 percent. This reduction implies the loss of 1.4 million jobs in fiscal 2017.

In years beyond 2017, the fiscal drag would remain considerable (and would likely damage growth and job creation), but we’re unable to forecast these impacts precisely because the Fed may have regained some scope to (at least partially) offset fiscal cuts in later years. Looking forward, while it is hard to precisely quantify by how much, the deeper budget cuts throughout the ten year window in the House GOP budget resolution would almost surely further hinder and delay a full economic recovery, especially in the near-term. 1

And the problem of this fiscal drag is not just a one-year problem. In the longer-run, a growing body of evidence strongly suggests that the decelerating productivity growth that has shown up recently in economic data is driven by the weak aggregate demand implied by precisely these types of austerity measures. This means that each additional year that a full economic recovery is delayed due to austerity, we’re also damaging the country’s long-run growth potential—highlighting the need to finally lock down a full recovery. One way to try to heal some of the damage done to productivity by recent austerity in the longer run is by making public investments to build the country’s stock of public and human capital, a key driver of long-run productivity growth. Instead, the House GOP budget resolution includes not only $887 billion of cuts to nondefense discretionary funding, but other extensive cuts to public investment, such as eliminating all mandatory spending for Pell grants. Coupling these disinvestments with the budget resolution’s near-term austerity measures implies a further erosion of productivity growth.

By coupling near-term austerity with longer-term cuts to public investment, this year’s House GOP budget resolution paints a picture of what dangerous fiscal policy looks like in the short and long run.

1. The cuts in fiscal 2017 of the House GOP budget resolution total $186 billion. We assume a very conservative multiplier of 1.25—Medicaid and SNAP have very high multipliers (between 1.5-2 or even higher), so 1.25 strikes us as quite conservative. This 1.25 multiplier implies that the House budget cuts will place a 1.2 percent drag on a GDP growth in the next year. This loss in GDP means, all else equal, that job-growth in the next year will be 1.4 million less. Putting that in context, job-growth in 2015 was 2.7 million, so the pace of job-growth would be cut by more than half in the coming year. We should note that we are quite confident about this impact for 2017, given that there is little scope or obvious appetite for monetary policymakers to provide enough stimulus with their policy tools to offset this fiscal drag. Cuts totaling $321 billion in fiscal 2018 will also likely drag significantly on growth, but uncertainty about other economic influences on recovery (particularly the response of the Federal Reserve) makes calculating exactly how much hard to quantify.