Cut, Cap And Balance: Not About Jobs in the Short Term

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Scott J. Ferrell / Congressional Quarterly / Getty Images

Congressional Budget Office Director Doug Elmendorf during the Senate Finance markup of its version of a comprehensive health care reform bill, October 13, 2009, Washington D.C.

Here is a Washington truism for 2011: It’s all about jobs, except when it is not, which is most of the time.

House Republicans are about to put their deficit cutting plan on the table, a snappy sounding piece of legislation called Cut, Cap, and Balance. It has three main parts: First, cut $111 billion out of next year’s budget. Second, cap government spending at about 20% of GDP, a level that would likely force major cuts to Medicare and Social Security, and major reductions in discretionary spending. The third part is a balanced budget amendment that would make it very hard to raise taxes.

There is a lot that can be said about this plan. But the most important thing may be the most immediate one. In the short term, by taking $111 billion out of the economy in 2012, Republicans are choosing a path that would slow short term economic growth, thereby costing jobs. In other words, it’s a short term anti-stimulus. The White House, for one, wants everyone to understand this point.

In a conference call on Monday afternoon, Jason Furman, the Deputy Director of the National Economic Council at the White House, pointed to this exchange with the chief Congressional bean counter, the CBO’s Doug Elmendorf, in a June  23 hearing:

GARRETT: So if we cut $100 billion out of ’12 budget, is that a sharp cut?

ELMENDORF: That’s enough of a cut that it would affect our projections for GDP growth over the next few years, yes, Congressman.

GARRETT: $100 billion would?

ELMENDORF: Yes.

GARRETT: To what extent?

ELMENDORF: Well, it depends on exactly what you change, right? So the analysis that we’ve done of the Recovery Act and of alternative policies for increasing output and employment show a range of different effects, depending on the specifics of the policy, which is I think the analysis you want us to be doing. It’s not just a matter of dollars; it’s a matter of what’s in the policy.

GARRETT: What percentage is that $100 billion of that $15 trillion economy?

ELMENDORF: Well, so the economy is $15 trillion dollars. One percent of that is $150 billion. So $100 billion is two-thirds of a percent of the economy. For some forms of changes in government policy, the effects on the economy could be less or more than that, but two-thirds of a percent is not trivial. The downward revision from the Federal Reserve’s forecast that got some coverage yesterday was this years’ economic growth or less than that.

P. RYAN: So two-thirds, so about a 0.66 percent cut in spending would, in your model, slow down the economy right now?

ELMENDORF: Yes.

Republican Paul Ryan is the one who jumps in at the end there. He clearly senses the political danger of where the discussion is leading. That Republicans have proposed a cut of $111 billion, or .74% of the economy, doesn’t exactly help.

The Federal Reserve downgrade that Elmendorf refers to amounted to a reduction in 2012 GDP growth projections from 3.5 to 4.2% to 3.3 to 3.7%. Reduce that again, and we could have growth in 2012 mired where it is in 2011, which, as you may have noticed, is not so good.

Republicans can argue that the business certainty that results from these cuts will more than compensate for the loss of GDP, especially in the out years. But that is an argument that the CBO is unlikely to score. And it is a case that Republicans will have to make next year during an election. It may not matter in the primaries, but for those wanting to get back to work it could certainly matter in the general election. And this seems to be something the White House is counting on.

On the same White House conference call, Communications Director Dan Pfeiffer was asked why he was organizing a conference call at all about Cut, Cap and Balance, since no one thinks it can pass the Senate, let alone get passed a presidential veto. He answered delicately. “I suspect this is a debate we will be having for a long time,” he said.

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