Our Fiscal Policy Is A Mess. Here’s How to Clean it Up.
The Murray-Ryan budget deal is marginally better than nothing; it prevents another federal government shutdown in January and provides a slight boost to discretionary spending over the next two years, relative to where we’d be absent this deal.
However, the deal demonstrates yet again that U.S. fiscal policy is a mess. Instead of dealing with the economic challenges of today—a sputtering economy, a jobs gap of nearly 8 million separating us from a pre-Great Recession labor market, long-term unemployment still at crisis levels, and nearly three job seekers for every job opening—policymakers are still acting as if future deficits are the single greatest threat to American living standards. No single fact exemplifies Congress’s preoccupation with deficit reduction than this: The Murray-Ryan deal will cut the ten-year deficit by about $23 billion—roughly the same amount as it would cost to extend federal emergency unemployment insurance for another year, a policy that would save 310,000 jobs in 2014.
It has indeed come to this. Given a clear choice, Congress would rather make symbolic gestures toward reducing the medium-term deficit—which is by no means a dire concern—than take on today’s economic challenges and help the most vulnerable among us.
The focus and the goal of our fiscal policy must change. Instead of self-defeating austerity measures, policymakers should make full employment and restoration of broad-based economic growth their top priorities. Here are three ways to refocus the fiscal policy debate:
1. Progressively increase revenue. Although reducing near-term deficits should in no way be considered a policy goal, if the economy returns to full economic health then valuable public investments and social insurance programs should be paid for with adequate revenue. Progressive revenue increases can begin even before the economy has reached full recovery, as the economic evidence shows that increasing taxes on the wealthy and on businesses provides only a very modest drag on growth, whereas cutting support for the most vulnerable is much more damaging to recovery.
2. Bolster social insurance. Not only is strengthening the social safety net good for economic recovery (as recipients are likely to immediately spend their benefits, thereby boosting aggregate demand), but unemployment insurance, nutrition assistance, housing subsidies, and the like are tremendously effective in keeping people out of poverty and in the labor force. These are policies that must be expanded, not cut. Further, as the other “legs of the retirement security stool” are crumbling beneath American retirees, Social Security and Medicare continue to provide a bulwark against poverty and provide a disproportionately large share of income gains for low- and moderate-income families.
3. Increase public investment. To achieve broad-based economic expansion, we will need both more jobs and more widely-shared public resources. Increasing spending on public investments will accomplish both of these goals.
The silver lining in this week’s deal is that it might signal the end of frantic political drama surrounding the manufactured “crises” of fiscal policy deadlines. Let’s hope this is step one in making better fiscal policy decisions.