How Much Harm Will it Do?

Stan Duncan

Now that we have raised the debt ceiling (or paid off the hostage-takers, depending on your point of view) it might be a good time to review how much damage the deal will do to the economy, to the recovery, and to ordinary people trying to hold down jobs.

Before I try to total that up, here is a brief overview of how we got here. You can skip down if you already know all of this.

Where did it come from?
Our US debt itself (the fact that we have borrowed money) has been around for a long time, but the deficit (the fact that we spend more than we make) was pretty much eradicated during the Clinton years. When president Clinton left office we had a surplus of about $412 billion and we were on track for eventually paying down the total debt itself (which was about $8 trillion). When President George Bush left office eight years later, the entire surplus was gone. The deficit had grown to over $500 billion, and the debt was around $14 trillion.

Liberals and conservatives argue over how much influence President Clinton or the high tech explosion had to do with that, but the fact remains that we had a surplus during his administration. He raised taxes and social spending and unemployment went down. And when people are employed they pay taxes. Remember that part: when people are employed, their taxes pull down the deficit.

President Bush had two unfunded wars, three unfunded tax cuts (one in the spring of 2008 that no one talks about), an unfunded prescription drug program, and a recession. The unfunded programs and tax cuts were like paying money out and the recession kept money from coming in (actually the recession did both: tax revenue went down and expenditures for unemployment insurance, food stamps, etc. went up).

At the end of 2008 and the beginning of 2009 both the Bush and Obama administrations spent hundreds of billions in stimulus to help stave off an economic meltdown. However, a good amount of President Bush’s spending was in loans to Wall Street, which have been paid back, and much of Obama’s was for jobs, which came back in terms of workers paying taxes, so in the long run neither of their programs impacted the deficit in the way that the wars, tax cuts, the drug program and recession did. Economists differ on how much all of these things drove up the deficit (see my previous post on that), but by any estimate except Rush Limbaugh’s, when President Obama took office the US deficit had soared upwards by trillions of dollars.

To be fair, this description of the origin of the deficit comes mainly from economists and observers from the right, left and center. There is an alternative view from people like Senate Minority Leader, Mitch McConnell (R-Ky), who argues that the deficit is the result of the “out of control spending” of unnamed members of Congress (apparently Democrats) between 2000 and 2008, and the “Job-killing tax increases” that President Obama might be pushing on us one of these days. Even though evidence for this view is difficult to come by, it seems to be the predominant opinion held by the media, the White House, and both houses of Congress.

So, where are we now? 
At the beginning of 2011, the Republican leadership in Congress announced that they had kidnapped the debt ceiling and would not let it go free until they had been paid an astronomical ransom in cuts in social spending. And if the Obama administration did not agree to their demands, they would blow up the economy by refusing to allow the federal government to borrow money. That act would throw our tepid recovery back into a deeper recession, families and jobs would be ruined for decades, and our future as a global economic player would be in jeopardy. They didn’t really want to do it, they said, but they had no choice because otherwise somewhere a few decades from now there might come a time when someone might get hurt if they didn’t do it. (They didn’t put it in quite those terms, but you get the idea.)

It is a form of what I call “Economic Apocalypticism,” the belief that we need to cause a catastrophic human apocalypse right now, with pain, suffering, and hunger, in order to create a pure capitalist order generations from now for our grand children. As examples of this, look at the draconian cuts in social spending imposed on poor and developing countries in the 1980s by the IMF and the resulting rises in poverty, homelessness, and illiteracy. It is sometimes referred to as “Shock Treatment” by economists like Jeffrey Sachs and others. It means: cause agony and death for hundreds of thousands of innocent people right now on the gamble that their grandchildren might be able to claw their way back into a middle class life years from now. The theory was common currency in the economic development circles of two decades ago and is apparently also behind the death threats of Congressional Republicans today.

The Democrats and the Obama administration inexplicably believed that the Republicans were not bluffing in their threats to destroy the economy, and moved into protracted hostage negotiations over how much to give up to keep them from killing the planet. Then, according to House Speaker John Boehner (R-OH), Congress agreed to ninety-percent of their demands, with an additional promise that a bi-partisan panel will be set up to decide how much more will be given to them later.

So, what is the damage?
Let’s begin by acknowledging that cuts in social spending will hurt the economy and drive up the deficit. We often hear that it will, of course, also cut the deficit, but not by as much as you think because the people you fire will no longer pay income or sales taxes. Firing people can lower the deficit, but it also to some degree increases it—that in addition to causing fear and pain to millions of innocent families. Cutting social spending in the middle of the worse job losses in seventy years is much like bleeding hemophiliacs to see if it will help them get well. It wasn’t successful in the 1200s, and it probably will not work today.

How much damage will it do? First, the debt reduction plan will cut $3 trillion from Federal spending over 10 years. That comes out to about $300 billion in spending reductions per year. The higher amounts of that, however, are set to be cut in future years so that people won’t feel as much of it before the elections, so for our present numbers let’s assume that only $100 billion will be cut next year.

So, deduct that $100 billion from our annual spending, which is presently around $3.5 trillion, and it will shrink the GDP by about 3%. (The math is 100/3,500.) That, by the way, is probably a bit low because it doesn’t take into account the “Multiplier effect.” Every time a dollar changes in hands there is a value added to it, which adds to the GDP. Direct Government expenditures can increase the GDP by anywhere from 1.20% to 1.75% (tax cuts, on the other hand, are usually a loss). So, the overall loss to the economy is probably larger than my simple equation.

According to a rule of thumb called “Okun's law,” if the GDP is depressed by 3%, then the unemployment rate should go up by about half that, or 1.5%. That is of course, assuming that only jobs will be cut and not waste, so to be fair, let’s assuming that in this first year we will only drive up unemployment by 1%.

Right now unemployment in America is 9.2%. Add another one percent to that and we get 10.2%. What this means is that the number of jobs lost by this act then, comes out to be about 1.5 million jobs next year. And that’s just at the start. More government-caused job losses are to come. Each year they will get larger; each year we will depress the GDP further and hurt families deeper.

Already cut backs in jobs and benefits on state and local levels are one of the major contributing factors in our high unemployment and low tax revenue and the first line of hurt will be state and local governments. One out of every three dollars of state spending comes from the federal government — $478 billion alone in 2010. That will definitely be cut. In the first half of 2011 almost all of the job gains in the private sector were lost again by firings in the public sector. From August 2008 to the present, over 577,000 jobs have been lost to government belt-tightening.

Some of the biggest items that are to be cut in the bill are spending on education and Medicaid for the poor That won't hurt many in Congress, who are generally richer than "average" Americans and prefer private schools for their children, but for the rest of us, it could be one more step in our national decline. Note that nearly every state government has already set its budget for the next two years assuming a certain amount of federal dollars to come in. With this bill, all of those programs will have to be cut back. Local governments will probably try to raise property taxes to raise revenue, but that would be one more drag on the housing market that’s already dragging the bottom. Many local municipalities are already filing for bankruptcy and that will accelerate depending on how fast Washington’s cuts begin impacting them.

As long as we believe that the pain and fear of our recession is not related to Wall Street gambling, Mortgage loan scandals etc., but out-of-control spending by God knows who in our pasts, and that the only way out of it is through cuts in taxes for the wealth and benefits for the poor, and that the only way to find God’s final realm for the next generation is by balancing our checkbook on the backs of the poor, the sick, the elderly and the very young, then we will continue to decline into what looks from this side as an abyss of madness and evil…but that’s just my opinion.

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