Who’s talking about budget cuts?
posted at 11:20 am on July 12, 2011 by Ed Morrissey
The negative corollary to Keynesian economics seems to be popping up frequently in the debate over the debt ceiling and budget deficits. Instead of arguing that increased, targeted government spending provides multipliers for job creation in the private sector, we’re now hearing that massive budget cuts will create a new recession and kill millions of jobs. Bruce Bartlett makes that argument in the New York Times, warning conservatives not to repeat the lessons of 1936-7:
Given President Obama’s endorsement of large budget cuts, the only question now appears to be how much fiscal policy will tighten and how fast. If it is back-loaded and mainly involves cuts in transfer programs, the impact on growth may be modest. But if – as I suspect Republicans will demand – the spending cuts are front-loaded and involve reductions in government consumption and investment spending, the impact could be severe.
While it’s unlikely that the Fed will repeat its error of 1936-7 and raise reserve requirements or the federal funds rate, it has already begun de facto tightening by moving from monetary stimulus to a more neutral stance. Moreover, with interest rates on Treasury bills hovering near zero, there is little it can do to stimulate growth on the monetary side.
Well, perhaps we’d be repeating an (arguable) error — if in fact anyone had proposed an actual cut in spending. As Nick Gillespie points out at Reason, the only proposals from either side involve a reduction in the growth rate of the federal budget, not reductions in spending:
Precisely who is calling for actual budget cuts right now? The correct answer is zero. That’s certainly true in the near term and all the trims (believe ’em when I see ’em) are from future increases in spending. The two budgets that are being debated remain Obama’s, which grows federal spending from about $3.8 trillion this year to $5.7 trillion in 2021, and Paul Ryan’s, which grows it to $4.7 trillion. Even factoring in the current arguments over the debt limit, nobody is talking about taking this year’s budget and cutting from it. That’s why they keep yapping about “deficit reduction,” which will take place somewhere down the road, at the intersection of Bushwah and Malarkey. …
Contra Bruce, there’s a strong case to be made that government austerity is precisely the tonic our sick economy needs. But whether you agree with that, there’s currently next to no chance that we’ll ever get a chance to find that out. If the first step of getting out of a jam is to use basic descriptive language, well, we’re not even talking yet.
We are having a similar argument in Minnesota. The governor shut down the government and claimed that Republicans wanted to cut government spending and reduce tax revenues. However, the budget produced by the Republican-led legislature actually increased biennial spending by 6% in real terms. The budget went from just under $31 billion to over $34 billion, which includes transfers to cover some costs from the previous biennium. Dayton calls this a cut because he wanted a series of auto-pilot increases to remain in effect, which would have produced a $37 billion biennial budget. Republicans literally met him halfway, and did so six weeks before the end of the session. Dayton waited until the session concluded to veto all nine budget bills and shut down the government.
It’s not just the spending side where the definition of “cut” is suspect, either. Over the weekend, the local Pioneer Press editorial board pointed out that, contra Dayton, the Republican budget actually increases revenues as well, by 6%:
Actually there is quite a lot of new revenue in the Republican proposal. Their plan is based on $2 billion of new revenue generated by the current tax system. Comparing last biennium to this, that’s a 6 percent increase in revenue in a low-inflation environment. Inflation is projected to be a modest 1.7 percent and 1.8 percent per year in the upcoming biennium, according to projections from the Minnesota Management and Budget office. So the 6 percent revenue increase works out to twice the rate of inflation.
And here’s a tidbit you may not have heard. Not only is revenue up 6 percent, individual income tax revenue is projected to be up 17 percent.
Gov. Mark Dayton is focused on the very tax category that is already projected to be up 17 percent to the prior biennium. According to MMB, nearly two-thirds of this increase is due to capital-gains increases based on the “extension of the special 15 percent federal tax rate on capital gains.” Which means the “rich” – the folks who tend to pay capital gains taxes – are paying significantly more in income taxes as a result of their capital gains tax rate remaining low. The obvious irony being that the rich are paying more because their tax rate stayed low, which is the exact opposite of the Dayton approach.
Capital gains is a special kind of income, but it is also a case study in howpeople shape their income on the basis of tax policy. When you tax something, you get less of it. And when you tax millionaires there will magically be fewer of them.
The governor, on the other hand, proposes to spend an additional $1.8 billion above and beyond the already 6 percent increase in revenue, or four times the rate of inflation.
There might be an argument that actual reductions in government spending would create a recession where one wouldn’t have occurred. Bartlett says that’s what happened in 1936-7, but one would have to show that the US had a recovery between that and the start of the Great Depression, which would be rather tough to do. In any case, we’re not going to be able to test that theory under any of the proposals floating around Washington, not even Ryan’s much-maligned proposal, because no one in Washington is seriously entertaining actual budget cuts. They’re all working under the Beltway definition of “cut,” which is “a reduction in the increase we proposed to spend.” (photo via MinnPost)
Update: One state worker says that Dayton should skip his driving tour of Minnesota this week and get back to work:
Altendorfer wants the Dayton and the Republican leadership to put aside their differences and get to work on a budget, no matter how long it takes. That means, she said, working all day, all night, every day.
And she especially doesn’t like the Dayton’s plan for a multi-city speaking tour.
“Forget it!” she said. “Get back and get the job done. I mean come on! How can you be on the road when you should be at the Capitol getting the job done?”