On the Debt Ceiling Deal

The protracted negotiations over the debt ceiling, as well as the final package agreed to by President Obama and the congressional leadership, show what happens when a small minority is allowed to gain control over national debate. While polls consistently show that the vast majority of the public sees jobs as the main problem facing the economy, there has been a well-funded crusade to ignore public opinion and make cuts to social insurance programs and other spending the top priority for Congress and the President.

To further this effort, the anti-deficit lobby has been willing to rewrite the history of the downturn and the deficit. The data clearly show that the large deficits of recent years follow from the downturn caused by the collapse of the housing bubble. Prior to the downturn, the deficits projected for 2009 and subsequent years were relatively modest. In fact, even with the tax cuts, the cost of the wars, and the Medicare prescription drug benefit, the debt-to-GDP ratio fell from 2004 through 2007.

By all logic, leaders in Washington should have been focused on restoring the economy to its potential. This would be the most effective way to bring the deficit down to a manageable level.

However the anti-deficit lobby has managed to dominate public debate and essentially pushed the sputtering economy off the agenda for both the president and congress. The cuts put in place as part of this deal will modestly slow growth in the short term and are likely to take a big bite out of the investment portions of the budget over the longer term.  If the country does not maintain its infrastructure, its research, and adequately support education it will hurt productivity and slow growth over the longer term.

The agreement also sets in motion a process that could result in substantial cuts to Medicare, Medicaid, and Social Security to meet its debt targets. This would hurt retirees and near retirees, many of whom saw much of their wealth eliminated with the collapse of the housing bubble. Remarkably, there is nothing here that would increases taxes on corporations or the wealthy even as the data show a record high profit share and polls show clear public support for higher taxes to balance spending cuts in any debt ceiling deal.

At a time when growth has slowed to a near halt and unemployment rate is again rising, it is tragic that the nation's political leadership has spent the last few months crafting a deal that is likely to slow growth further and take away supports from the people who have been hit hardest by the downturn.

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The Impact of the Budget Deal

Many readers of the NYT and Post may not have a good sense of how much $2.4 trillion in cuts over the next decade is. Unfortunately, the major news outlets do not consider it their responsibility to tell us.

The government is projected to spend $46 trillion over the next 10 years. This means that the proposed cuts are a bit more than 5 percent of projected spending. However, large categories of the budget are protected. More than $27 trillion of projected spending goes to Social Security, Medicare, Medicaid, and interest. If these areas escape largely untouched, the projected cuts would be around 13 percent of the remaining portion of the budget.

In fact, since some other areas of the budget, like unemployment insurance, are also likely to be largely protected, the cuts to the remaining portion of the budget will be even larger.

The government is projected to spend $7.8 trillion on the military over the next decade. If this area is largely protected, then most of the cuts would likely come from the $6.7 trillion of spending on the domestic discretionary portion of the budget. This is the portion that includes spending on infrastructure, education, research, and other areas that are considered investment.


Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, including False Profits: Recovering from the Bubble Economy.  

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