Obama’s Budget: Mostly a Political Document, and That’s Just Fine

This post originally ran on the Wall Street Journals Think Tank blog.

The White House released its annual budget on Monday for fiscal year 2016. On the one hand, this may seem like a low-value exercise, given the dim prospects for its major initiatives passing a Republican-controlled Congress. But on the other hand, the raft of stories written about it prove the president continues to have unrivaled power in setting the terms of policy debate.

And the terms set by the 2016 budget are really useful.

Most of the big-ticket items were previewed: significant increases on tax rates for the highest-income households on income they receive simply from wealth-holdings, higher taxes on large transfers of wealth, tax cuts for low- and middle-income taxpayers, and substantial spending increases on community colleges, early childhood care, and infrastructure.

One item that wasn’t telegraphed by the White House included corporate tax reforms that would impose a minimum 19% tax on foreign earnings of U.S. firms with no opportunity for deferral. This is a very big step in the right direction, if still a little shy of perfect since deferral should be ended and U.S. firms should be taxed at the going corporate income tax rate regardless of where income is earned. But 19% is a lot better than today’s implicit 0% on income held abroad. Further, a large chunk of the budget’s infrastructure proposals is financed by a one-time tax of 14% on accumulated earnings of U.S. corporations held abroad. Again, this is much better than the frequently floated alternative of allowing U.S. firms to repatriate their foreign-held earnings at a preferential rate.

The boost to infrastructure spending would pay big dividends – both in near-term job-creation and longer-termproductivity growth. And financing it with a one-time tax on corporate earnings held abroad is an excellent idea. Earnings that are doing nothing for U.S. job-growth could be mobilized to increase the pace of economic recovery.

Another welcome initiative in the budget would make the unemployment insurance (UI) system more responsive to recessions. The current “triggers” that allow UI benefits to be extended when the economy enters recession are poorly constructed for the prolonged jobless recoveries that have characterized the U.S. business cycle since the early 1990s. UI recipients must rely on prompt, intelligent and compassionate action from Congress to extend benefits during long periods of economic weakness. This hasn’t turned out very well – as evidenced by the cutback in extended federal benefits at the beginning of 2014 at a time when the long-term unemployment rate was double the level that prevailed in June 2008 when the extended federal benefits were first legislated.

Another welcome addition to this year’s budget is a clear-eyed assessment of recent years’ fiscal policy making and how it has hobbled the economic recovery. In a section titled “Helping, Not Hurting the Economy: The End of Austerity and the Move Away from Manufactured Crises,” the budget notes that “sequestration” (across-the-board spending cuts legislated as part of the 2011 Budget Control Act) dragged heavily on growth in 2013. And in fact, other cuts as part of the BCA dragged on growth even before this. They also note that the 2013 budget deal that temporarily suspended most of the sequester’s bite in 2014 was a key contributor to the better economic performance last year, and urge for the end of the sequester in coming years. This is important to have on record.

Political realities will almost surely not allow the administration’s budget to sail through Congress, and even the much-better 2016 Obama administration budget falls short of the fiscal impulse that would actually push the economy rapidly to full employment. But for the sake of future policymakers’ response to deep economic downturns, it’s important to tell the true economic history of the grindingly slow recovery from the Great Recession.

The most important aspect of this economic history is the opportunism of congressional Republicans in using manufactured crises (like the normally pro forma vote to raise the legislated debt ceiling in 2011 and 2013) to try to enforce fiscal austerity. And this fiscal austerity in turn entirely explains why we still remain far from fully recovered from the Great Recession today.

All in all, the 2016 White House budget is a welcome document, both in its policies and in its analysis.