Shrinking Federal Budget Deficits

by John M. Curtis
(310) 204-8700

Copyright Feb. 4, 2013
All Rights Reserved.                                         

           Congressional Budget Office rained on House Budget Committee Chairman Paul Ryan’s (R-Wis) plan to slash federal spending.  Ryan, who ran—and lost—as former GOP presidential nominee Mitt Romney’s running mate in 2012, insisted that the federal government must slash popular entitlement programs like Medicare, Medicaid and Social Security.  Romney and Ryan said that the economy under President Barack Obama was in free-fall, prompting fiscal conservatives to wield the budget ax.  Barack’s last minute deal to resolve the so-called “fiscal cliff” Jan. 1 increased taxes on taxpayers earning over $450,000 now changes Washington’s revenue stream, adding billions to the federal Treasury.  Ryan’s plan to allow $85 billion in federal spending cuts would slow the economy according to the CBO.  Fiscal conservatives, like Ryan, want more cuts only on principle.

With the economy adding 157,000 more jobs in January, federal deficits continue to shrink on their own, eliminating the need for more cuts to reduce the deficit  When the joint Congressional “Super Committee” on deficit reduction failed to reach an agreement Nov. 21, 2011, it set up the “fiscal cliff” battle continuing to play havoc on U.S. growth.  Federal Reserve Board Chairman Ben S. Bernanke and the CBO warned about slashing federal spending during a time of fragile economic recovery.  ‘Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on the federal debt,” the CBO warned.  Yet the CBO hasn’t taken into account continued reduction in the national unemployment rate, adding billions to the Federal Treasury and further reducing deficits, regardless of new expenditures. 

Despite steady jobs growth in January, the unemployment rate bumped up from 7.8% to 7.9% largely due to seasonal factors, especially temporary Christmas-hiring layoffs.  Predicting a $616 billion deficit in 2014 and $450 billion in 2015, CBO Director Douglas Elmendorf sees less need for automatic spending cuts advocated by Ryan and House Majority Leader Eric Canto (R-Vir.).  Elmendorf conjectured that a growing national debt could be 7.7% of the nation’s GDP by 2023, comparable to the post-WWII years of the 1950s.  When deficits ran high in the early ‘80s under the late President Ronald Reagan, he advocated more spending to stimulate the economy.  Reagan believed that slashing government spending would increase the unemployment rate and add to federal budget deficits.  “The CBO’s report is yet another warning that we need to get spending under control.  The deficit is still unsustainable,” said Ryan, mixing up the deficit with the national debt.

 As unemployment improves and deficits drop, the fraction of the deficit to nation’s GDP also shrinks.  Deficit hawks like Ryan and Cantor don’t see the value of a strong federal work force to help stabilize the economy.  Romney and Ryan’s plan, that was roundly rejected Nov. 6, 2012 by voters, would have tossed thousands of federal workers into unemployment.  “The report confirms that the economy has made important progress over the last few years, but there is clearly more to do,” said Rep. Chris Van Holen, ranking member on the House Budget Committee, disagreeing with Ryan’s plan to slash the budget.  “Our first priority must be putting Americans back to work, but unfortunately, congressional Republicans have blocked progress at every turn,” said Van Holen, referring to Ryan’s insistence on slashing the federal budget. Neither Romney nor Ryan ever acknowledged the importance of the federal workforce to the national economy and GDP.

If voters believed Romney and Ryan’s projections in the 2012 campaign, they would have won the election.  Both promised millions of new private sector jobs but wouldn’t say how they’d accomplish it.  Rising to its highest level since Oct. 2007, Wall Street continues to junp  on expectations of higher growth.  Slashing federal spending would hurt all industries dependent on government contracting, especially the defense and oil industries.  Modifying any deficit reduction plan is necessary to stimulate more economic growth. With 2013 economic growth expected at 2%, more cuts in government spending could plunge the economy in a double-dip recession.  Ryan’s current plan to slash government spending would take around one percent off the U.S. GDP, putting the economy dangerously close to another recession.  Obama wants to postpone any automatic spending cuts, especially if it’s going to scale back the federal workforce.

Given Wall Street’s strong performance pulling the economy out of the last recession, Ryan’s House Budget Committee must account for the harmful effects of slashing federal spending.  Warned by the Fed and most economists, the economy can’t afford too many cuts to the federal budget.  Even if the debt ceiling continues to rise, it’s more important to keep reducing the unemployment rate to assure lower federal budget deficits and higher GDP.  It’s penny wise and pound foolish to toss more federal workers or government contractors into unemployment when the best long-term fix to the economy is full employment.  Private sector and government employment help accomplish the same goal:  Generating more tax dollars, reducing federal budget deficits and improving GDP.  With the election long gone, it’s time for the GOP to stop playing obstructionist and work with Democrats to stimulate the economy as much as possible.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.