Boehner’s ‘Plan B’ would result in an austerity-induced recession
With headlines like “Boehner drops effort to avoid ‘fiscal cliff’” saturating the Internet today, a little clarification is sorely needed: Speaker of the House John Boehner’s (R-Ohio) so-called “Plan B” may have been many things, but it was certainly not a plan to avoid an austerity-induced recession in 2013—which is what people should be talking about, anyway, when they refer to “avoiding the fiscal cliff.” The plan would have mitigated less than one-third of the pending fiscal drags from the various components of the fiscal obstacle course (our preferred alternative to the doubly-misleading “cliff” metaphor). For the millionth time: The fundamental challenge facing policymakers is that budget deficits closing too quickly in the next couple of years will kill the anemic economic recovery, so the pace of deficit reduction must be moderated. But Boehner’s failed plan was instead fixated on accelerating the pace of deficit reduction relative to current policy.
Boehner’s Plan B consisted of two bills. The first, the Spending Reduction Act of 2012 (H.R. 6684), which narrowly passed 215-209 yesterday, would replace scheduled sequestration spending cuts for fiscal year 2013 to the Department of Defense budget with deeper sequestration cuts to nondefense discretionary spending as well as a host of mandatory spending cuts, including: food stamps, Medicaid, employment and training programs, federal employee’s retirement benefits, and defunding the Affordable Care Act. Relative to current policy (which assumes sequestration does not occur), spending would be reduced in 2013. Over a decade, some $98 billion in reduced defense spending would be replaced with $334 billion in nondefense discretionary and mandatory spending cuts as well as revenue savings.
The second component, the Permanent Tax Relief for Families and Small Businesses Act of 2012 (H.J. Res. 66), would have continued the Bush-era income tax cuts for households earning up to $1 million (above which the top rate would revert to 39.6 percent), extended capital gains and dividends tax cuts for households under this threshold (15 percent rate, as opposed to a preferential 20 percent rate above), permanently continued the recent estate and gift tax cuts, permanently patched the Alternative Minimum Tax (AMT), and permanently repealed the limitation of itemized deductions and personal exemption phase-out (progressive tax measures also phased-out by the Bush tax cuts). The American Reinvestment and Recovery Act (ARRA) expansion of the refundable Earned Income Tax Credit, Child Tax Credit, and American Opportunity [tuition] Tax Credit would be allowed to expire, thus raising taxes on households earning under $30,000 on average, relative to current policy.
This legislative duo stacks up exceptionally poorly against our à la carte menu of the fiscal obstacle course. But first, the context for the economic impact of budget policy is a current law fiscal trajectory projected to cause a recession in the first half of 2013—an annualized real GDP contraction of 2.9 percent—with a 3.7 percentage point real GDP drag from fiscal policy pulling the U.S. economy down 0.5 percent for the full year. Relative to this recessionary current law baseline, Boehner’s Plan B would boost real GDP growth by:
- Under 0.5 percentage points from continuing almost all the Bush-era tax cuts and estate tax cuts.
- Roughly 0.4 percentage points from patching the AMT.
- Just above 0.2 percentage points by replacing defense cuts with nondefense cuts that are slightly smaller in magnitude in 2013, the same in 2014, and a net drag starting in 2015.
So Boehner’s two-pronged economic policy is projected to boost real GDP growth by roughly 1.1 percentage points on an annualized basis, relative to current law. That means the expected annual growth rate for 2013 would fall to roughly 0.6 percentage points—meaning the labor market would be markedly deteriorating, as growth rates of between 2.0 percent and 2.5 percent are needed just to keep treading water. And it also means the U.S. economy would slip into an austerity-induced recession in the first half of the year, as the 1.1 percentage point boost to growth is well under half the annualized rate of contraction for the first half of the year.
The recession would result from failing to slow the pace of deficit reduction relative to current fiscal policies offering substantially more economic support. Notable fiscal drags also built into the current law baseline but thoroughly unaddressed by (or resulting from) Plan B include:
- Expiration of the payroll tax cut: -0.9 percentage points.
- Expiration of emergency unemployment benefits: -0.4 percentage points.
- Expiration of ARRA refundable tax credit expansion: -0.1 percentage points.
- Even bigger nondefense sequestration cuts: -0.5 percentage points.
- Budget Control Act (BCA) discretionary spending caps: -0.4 percentage points.
These drags alone imply a fiscal drag of roughly 2.3 percentage points to real GDP growth relative to pre-BCA current policy. Trend economic growth since mid-2010 (since fiscal policy became a net drag after the peak ARRA boost) has decelerated to 2.0 percent—these drags would result in negative growth. And this list assumes other routinely annually renewed provisions—the business tax extenders and the Medicare “doc fix”— don’t add a further drag to growth (0.3 percentage points combined). Again, Plan B would mitigate less than one-third of the entire 3.7 percentage point fiscal drag projected for 2013.
Boehner’s loss of control over his caucus coupled with deep-rooted intransigence by the hard right of the House Republicans unquestionably increases the likelihood of an austerity-induced recession in 2013. But to be clear, even Boehner’s Plan B would still have all but guaranteed a recession in 2013, because the GOP has fundamentally misdiagnosed the challenge at hand. This legislative gambit coupled with Boehner’s press conference this morning demonstrates that, from their lens, the pressing policy challenges are cuts to the defense budget and expiration of the upper-income Bush-era tax cuts. But the problem at hand remains overly rapid deficit reduction pushing the economy into an austerity-induced recession—inversely related to deficit reduction. So, yes, Boehner’s plan has been dropped, but, no, it was never a plan to avert the “fiscal cliff”—it was instead just another laundry list of Republican priorities almost entirely unrelated to sound economic stewardship.