SABOTAGE: How the Republican Party Crippled Americas Economic Recovery

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While policymakers should be pursuing renewed fiscal expansion to accelerate the inadequate pace of economic and employment growth, Congress has instead enacted austerity measures—largely ignoring the economic and budgetary damage wrought by austerity budgets in the United Kingdom and other developed countries. The contraction of government spending in the wake of the Great Recession is unprecedented. When multiplier effects are taken into account, this level of spending would already have induced a full recovery Bivens By prematurely pulling away from fiscal support, policymakers are condemning the economy of the future to depressed output, anemic growth, high unemployment rates, and large cyclical budget deficits Bivens, Fieldhouse, and Shierholz Instead of prioritizing recovery, the Washington budget debate remains entirely focused on the one policy intrinsically at odds with spurring near-term economic growth—reducing budget deficits—and deficits will remain high as long as the economy is depressed.

Using fiscal policy to boost aggregate demand remains the key to restoring full employment, and will actually prove largely self-financing in dollar terms and improve key metrics of fiscal health notably the public debt-to-GDP ratio in the near term, as long as interest rates remain historically low.

Conversely, budget austerity—particularly cutting spending—is so economically damaging that it actually becomes fiscally counterproductive in current conditions, with the sequestration spending cuts actually projected to increase the debt-to-GDP ratio Fieldhouse b. The risks of austerity were also highlighted by concerns over the fiscal cliff in late ; if no congressional action were taken, budget deficits would have closed too quickly meaning debt would not be allowed to rise fast enough and the economy would have been pushed into an austerity-induced recession CBO a.

Having avoided the crippling austerity that has driven much of Europe back into recession, the United States is now embarking on the austerity path despite a wide consensus among economic experts that austerity wreaks havoc on depressed economies Blanchard and Leigh Instead of austerity, what is truly necessary to ensure a rapid return to full employment is larger near-term budget deficits, which are a natural byproduct of government correctly acting to close the shortfall in aggregate demand through public investment, safety net spending, and federal support to state and local governments.

The Better Off Budget takes a strong stand for such policies by unequivocally affirming the goal of closing the output gap and returning the economy to full employment, all while ensuring sustainable projected deficit and debt levels. The following sections describe first the spending proposals and then the revenue policies in the Better Off Budget see Table 1. Tables and figures can be found at the end of this report.

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The Better Off Budget makes targeted investments in job creation and infrastructure spending aimed at rapidly restoring full employment and supporting sustained recovery, while also making targeted cuts to reflect national priorities and improve efficiency in the budget. Although outlays would rise to The Better Off Budget ramps up spending in the near term in order to support economic recovery and pursue full employment. Investments over the year window are thus front-loaded to address current economic needs; 63 percent of total job creation measures within the year FY— window are allocated over FY—, corresponding with the calendar years —, when the Better Off Budget most heavily invests in stimulus measures and when economic support is most needed see Table 2.

Sixty-three percent of these investments are made between now and the end of calendar year in order to target full employment; the remainder of the spending consists of sustained investments in infrastructure, green manufacturing, and research and development. The package of public works jobs programs fully finances initiatives proposed by Rep. To provide both an economic boost as well as individual assistance to the near-record numbers of long-term unemployed workers, the Better Off Budget restores the emergency unemployment compensation EUC program to support up to 99 weeks of benefits in calendar years — Subsequently, despite an acute long-term unemployment crisis—federal extended unemployment benefits have never been cut with a long-term unemployment rate as elevated as it is now Shierholz a —Congress allowed the EUC program to lapse completely in December As shown in Table 2, the Better Off Budget also funds a number of job creation tax measures.

It introduces the Hard Work Tax Credit, an expanded version of the now-expired Making Work Pay tax credit, for calendar years — In its first two years, the Hard Work Tax Credit will be percent of the old Making Work Pay credit, before phasing out in the third calendar year.

In addition to these targeted job creation measures, infrastructure investments, and tax credits, the Better Off Budget invests heavily in the nondefense discretionary NDD budget, which houses a range of critical public investments in areas such as education, energy, basic scientific research, workforce training, and health. This increase in NDD spending also covers a 4 percent raise in for federal civilian employees. This classification of federal spending is especially vital because much of it is needed public investment—purchases the government can make now that will boost employment in the short run but provide lasting benefits, such as infrastructure and education.

Under current law, such investment will soon reach its historical low as a share of GDP and continue to decline thereafter Smith The Better Off Budget also proposes realigning defense priorities and finding other targeted and efficient savings in the budget. The Better Off Budget repeals these cuts and replaces them with similarly sized cuts.

The Better Off Budget achieves savings outside of the Defense Department as well, many of which would build on the efficiency reforms already enacted in the Affordable Care Act. The budget implements the following policies: the addition of a public insurance option to Affordable Care Act health insurance exchanges, negotiation of Medicare Part D pharmaceutical drug prices with pharmaceutical companies similar to current negotiation of drug prices through Medicaid , reform of pharmaceutical drug development and patent rules, payment and administrative cost reforms, and efforts to reduce fraud and abuse in Medicaid.

The U. The Better Off Budget would reform the tax code by enacting policies that would restore lost progressivity so that effective tax rates rise with income , push back against rising income inequality, raise sufficient revenue, and close inefficient or economically harmful loopholes. Although tax increases are contractionary in current conditions, the economic impact of a dollar of government spending as shown by the fiscal multiplier is about four to seven times higher than the economic impact of a dollar of revenue Bivens and Fieldhouse Since much of the revenue would be raised from upper-income households and businesses which have relatively low marginal propensities to consume and thus particularly low fiscal multipliers even among tax changes and used to finance high bang-per-buck job creation measures, the relatively small fiscal drag from raising revenue would be more than mitigated by the other budget policies.

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Though higher relative to GDP than the previous postwar high point of The Better Off Budget would increase progressivity of the individual income tax code by adding the five higher marginal tax rates at higher income thresholds from Rep. As Table 1 shows, the Better Off Budget makes a number of additional policy changes to the individual income tax code. On the corporate side, the Better Off Budget eliminates some of the most egregious loopholes and enacts other progressive reforms.

The budget repeals voluntary deferral of taxes owed on U.

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Bernard Sanders I-Vt. Keith Ellison D-Minn. Besides increasing progressivity in the individual and corporate income tax codes, the Better Off Budget reflects the belief that government should levy Pigovian taxes so that the consumption of certain goods reflects their true societal costs.

The Better Off Budget imposes a financial transactions tax FTT in order to raise significant revenue while dampening speculative trading and encouraging more productive investment. Because pricing carbon has the potential to be regressive, the Better Off Budget, like the Back to Work budget before it, would rebate 25 percent of the revenue from carbon abatement as refundable credits to low- and middle-income households. It enacts Sen. Revenue levels in the budget average Closing the output gap between actual economic output and potential, noninflationary levels of output is a key barometer for restoring full employment, and the Better Off Budget would finance enough in job creation measures and public investments to roughly close the projected output gaps in calendar years — Similarly, we project that the Better Off Budget would lower the unemployment rate to between 4.

Given that calendar year is nearly a quarter gone, and given as well that some spending might create jobs only after an additional lag, the job creation numbers for might come in below these projections, but this means that our estimates for would rise as activity and job creation spilled over into that year. Our baseline forecast for without additional lag considerations is 2. Similarly, the projected range of 4. Discounting time lags, the unemployment rate would be expected to range between 5. Again, the only real concern this raises is that some of the impacts will be pushed from the end of and into early Either way, the Better Off Budget will both enshrine and accelerate an economic recovery that at the moment is coming too slowly, and too many policymakers are assuming to be inevitable and imminent.

The associated boost to aggregate demand would be enough to close the output gap, taking into consideration lesser economic headwinds from raising additional revenue which has a countervailing contractionary effect, albeit relatively small per dollar. Sustaining stimulus for several years would be necessary to avoid creating a fiscal cliff demand shock i. The author would like to thank colleagues Josh Bivens, Tom Hungerford, and Christian Dorsey for their help with this project.

Thank you finally to Lora Engdahl for her helpful suggestions and excellent copyediting. All errors or omissions are solely the responsibility of the author. His focus is on federal tax and budget policy. Table 1 at the end of the paper stacks the major policy alterations to the February baseline and broadly separates policy proposals into two categories: revenue policies and spending policies.

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All policies are depicted as the net impact on the primary budget deficit excluding net interest rather than the impact on receipts and outlays. Note that many revenue policies in Table 1 include related outlay effects i. Spending changes in Table 1 reflect outlays rather than budget authority. Debt service is calculated from the net fiscal impulse to the primary budget deficit, and the unified budget deficit is adjusted accordingly.

In some instances it is necessary to extrapolate from existing official or trusted scores e. In these instances, the out-year scores are adjusted as a rolling average of the change in revenue or outlays for the last three years of an official score.


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Where available, revenue and outlay effects, as well as on- and off-budget effects, are extrapolated separately. All policy changes affecting Social Security are modeled as off-budget revenue and outlay effects and are reflected in the summary tables as such. Unless otherwise specified, all tax policies are assumed to be implemented on January 1, Tax policies modeled from scores starting before FY assume 75 percent of the revenue score for that year the three quarters of FY in calendar year Finally, it should be noted that not all possible interaction effects between tax policies are taken into consideration in this budget model; stacking and running all of the tax policies through a microsimulation model was beyond the scope of our technical support for budget modeling.

Many of the individual income tax proposals, however, were collectively modeled by the CTJ using the Institute on Taxation and Economic Policy ITEP microsimulation and accordingly account for interaction effects, including those with the alternative minimum tax and refundable tax credits. A fiscal multiplier of 1. Multiplier estimates of increased taxes on upper-income households following Obama policy and corporations are lower, at 0.

The multiplier for pricing carbon would be somewhat higher, even taking into consideration the refundable rebate, and 0. Policy adjustments for are calculated as percent of FY and 25 percent of FY budgetary costs. Following the methodology in Bivens and Fieldhouse , a multiplier of 1. Specifically, the change in unemployment is projected by the percentage-point change in the relative output gap actual output divided by potential output divided by 2. Estimates for the change in nonfarm payroll employment are based on the percent change in GDP, using the methodology outlined in Bivens b.

In our estimates the peak macroeconomic effect occurs at the end of The unemployment rate continued to hover near 10 percent. A broader measure that includes discouraged job seekers and those forced to accept part-time work was near 17 percent. GDP was growing again after a disastrous , but at an anemic rate of about 2 percent a year.

Wage growth, adjusted for inflation, was actually negative : Salaries were shrinking, and still no one was getting work. They desperately needed to sell assets to remain solvent, but when everyone wants to sell all at once, and nobody wants to buy, the result is a death spiral: Falling prices require ever more asset sales, which in turn produce ever steeper price drops and further asset sales. This vicious cycle eventually transformed an ordinary recession into something far more threatening—a banking crisis recession.

Ironically, it was none other than Reinhart and Rogoff who had warned us of this in their magisterial—and sardonically titled—study of financial crises throughout history, This Time Is Different. They found that while government action might rescue broken financial systems fairly quickly in this latest case via bank bailouts and emergency cash injections by the Federal Reserve , the wider recessions brought on by financial crises typically last a very long time.

Five years is hardly unusual. If anything, This Time Is Different should have been taken as a well-timed warning to respond to this recession even more forcefully than usual. What was needed was for the federal government to apply the same urgency to rescuing the economy that it had to rescuing the banks. In every recent recession, rising government spending provided a backstop to the recovery except this one.

Everyone suddenly needed to pay down all that debt they had taken on so exuberantly during the bubble. In other words, everyone wanted to save, and no one wanted to borrow or spend. Factories are shuttered, workers are laid off, and unemployment skyrockets.

The federal government is the only logical candidate for this rescue operation, and with recovery still perilously weak in , the obvious response would have been a second dose of stimulus spending. But the political world was already moving in the opposite direction.

Nor was it just Republicans. In the end, for reasons both political and ideological, Obama decided that he needed to demonstrate that he took the deficit seriously, and in his State of the Union address he did just that. To that end, he announced a three-year spending freeze and the formation of a bipartisan committee to address the long-term deficit. Sure, there were still a few economists who believed that even in a deep recession government spending merely crowded out private spending and thus did no good, but they were a distinct minority.

Most economists acknowledged that deficit spending was appropriate at a time like this. After an exhaustive review of government debt levels throughout history, they concluded that there was a hard threshold beyond which government debt got so high, it could actually tank the economy. When debt was between 0 and 90 percent of GDP, there was no problem. But when debt exceeded 90 percent of GDP, economic growth was cut in half. Obviously, we were doomed. There had always been plenty of those.

But Reinhart and Rogoff really seemed to deliver the goods. It was no longer a matter of whether deficit spending was helpful in principle—an argument that had been going on for decades and showed little prospect of ever being resolved. In this particular recession, we were already past the 90 percent danger point where further debt would have disastrous future consequences. And with that, the trajectory of the next three years was set: It would be austerity as far as the eye could see. They were cited by columnists. They testified before Congress.