President Obama’s opening bid for negotiations resolving the “fiscal cliff” has surfaced, and the contours are both familiar and sound. The Washington Post and an unofficial outline drafted by Republican aides both suggest that the administration has essentially proposed its budget request for fiscal 2013. And the president’s latest budget offers a solid framework for navigating the fiscal obstacle course, as it would substantially moderate the pace of deficit reduction while making a responsible down payment on longer-term deficit reduction. Relative to current policy, the contours are shaping up roughly as follows:
§ Allow the upper-income Bush tax cuts to expire (+$850 billion)
§ Restore the estate and gift taxes to 2009 parameters (+$120 billion)
§ Curb tax expenditures (+600 billion)
§ Stimulus spending (-$50 billion)
§ Extend emergency unemployment benefits (-$30 billion)
§ Extend or replace the payroll tax cut (-$110 billion)
§ Continue AMT patch, “doc fix,” and tax extenders (-$240 billion)
§ Defer sequestration (?)
Most critically, the Obama framework includes a variation of his American Jobs Act, proposing increased near-term government spending on infrastructure and state fiscal relief while maintaining the ad hoc stimulus set to expire at year’s end—the emergency unemployment compensation (EUC) program, the payroll tax cut, and recent expansion of refundable tax credits—which is the single largest economic headwind threatening recovery among the major components of the scheduled fiscal restraint. (See our à la carte deconstruction of these major components’ budgetary versus economic impacts) The Republican aides’ draft suggests the administration would dedicate $50 billion for infrastructure and stimulus spending, $30 billion for EUC, and $110 billion for an extension of the payroll tax cut or a targeted tax credit, all relative to current policy. And if the administration is looking for a replacement for the payroll tax cut, they could adopt our proposed targeted refundable tax rebate, which would provide a bigger and better economic boost.
Beyond these job creation measures, the president’s proposal for dealing with the economic challenge at hand of overly rapid deficit reduction would largely adhere to current policy—the alternative minimum tax would be indexed for inflation, scheduled Medicare physician reimbursement cuts would be prevented (i.e., the “doc fix” would be continued), expiring business tax provisions would be continued, the sequester would not be implemented in 2013, and the Bush-era tax cuts would be extended for all but upper-income households (those earning more than $250,000 a year). Again, this is all consistent with the president’s budget, with the exception that the budget repealed the sequester instead of deferring it to an unspecified date.
Overall, this proposal would substantially moderate the pace of deficit reduction relative to the current policy, which is critical because this baseline includes sizable fiscal contraction (the payroll tax cut and emergency unemployment benefits are assumed to expire and discretionary spending caps ratchet down). Indeed, the entire challenge posed by the fiscal obstacle course is that budget deficits closing too quickly will push the economy into an austerity-induced recession, and the president’s opening bid actually addresses this very real economic challenge, prioritizing job creation and economic recovery over the (not imminent) problem of longer-term deficit reduction.
But the proposal would make substantial long-run deficit reduction as well. It would allow the upper-income Bush tax cuts to expire, raise roughly another $600 billion from upper-income households and business (presumably by capping the value of tax expenditures), return the estate and gift tax to 2009 parameters, reduce Medicare and Medicaid spending by nearly $400 billion (largely without cost-shifting to states or households, with most savings from providers and pharmaceutical companies). Again, these are all proposals from the president’s budget request. As I calculated a few months back, the president’s budget—as scored by the Congressional Budget Office and adjusted for subsequent baseline revisions—would reduce public debt by $3.0 trillion relative to current policy, lowering the debt-to-GDP ratio to a sustainable 73.4 percent. (Add in the nearly $1 trillion from ending the war in Afghanistan, already built into current policy, and you hit the $4 trillion mark that has become the arbitrary but symbolic threshold for fiscal seriousness.)
A back of the envelope calculation suggests that the combination of continuing EUC, continuing the payroll tax cut, increased infrastructure spending, and expiration of the upper-income tax cuts would boost real GDP growth by 1.5 percentage points and increase nonfarm payroll employment by 1.8 million jobs by the end of 2013, relative to current policy. Details on timing of other deficit reduction are lacking, and would likely somewhat reduce the net economic boost, but the proposal nevertheless offers substantial net fiscal support for our depressed economy. My colleague Josh Bivens and I estimated in another recent paper that the president’s 2013 budget would boost employment by about 1.1 million jobs in 2013, largely because of AJA spending and targeted tax cuts (which we delayed one year from the now-ended 2012 fiscal year to allow for feasible implementation).
This framework also closely resembles the proposals in our recent EPI and Century Foundation report Navigating the fiscal obstacle course: Supporting job creation with savings from ending the upper-income Bush-era tax cuts. We proposed diverting half of the savings from ending the upper-income Bush tax cuts and recent estate tax cuts—roughly $600 billion—to job creation measures heavily weighted toward the next three years, which would boost real GDP growth by 1.7 percentage points and increase employment by 2.0 million jobs in 2013. The upper-income Bush tax cuts are the least economically supportive component of the fiscal obstacle course and have a huge opportunity cost; as far as down payments on deficit reduction go, this is the most sound starting point—as the president has proposed in all four budget requests.
The one major departure from the president’s budget is the new and excellent proposal to eliminate the statutory debt ceiling. The statutory debt ceiling has proved an unacceptable economic liability, particularly since Speaker of the House John Boehner (R-Ohio) irresponsibly pledged in May that he would again hijack the nation’s debt ceiling to be used as a bargaining chip. This duplicative, ill-conceived law should be repealed, or at the very least ruled inoperative.
The president’s budget offered a sound template for moderating the pace of deficit reduction, coupled with a down payment on longer-term deficit reduction that would impose little near-term economic drag—substantially less than the economic boost from the AJA. By adding repeal of the debt ceiling to this balanced package, the president’sopening bid makes for an even more responsible economic and budgetary policy.