Rx for a Double-dip Recession: Cut Government Spending by 15 Percent

By :: June 7th, 2011

Apparently nostalgic for recession, more than 100 House Republicans have proposed to cut federal spending by $550 billion in 2012. The Republican Study Committee (RSC) doesn't ever quite say this is their plan, but it is. One hardly knows where to begin.

This is an amazing number. It implies a 15 percent reduction in government spending in a single year—in the midst of a weak economy with unemployment that exceeds 9 percent.  It is an austerity budget of historic proportions.  Just to compare, the United Kingdom is moving to cut spending by 20 percent over four years. The House Republican budget devised by Budget Committee Chair Paul Ryan (R-WI) would cut 2012 spending by about 3 percent or $110 billion. The RSC would make Ryan look like a crazed liberal. Of course, that may be the idea.

Not only do these lawmakers appear oblivious to the real economy, they may also be fundamentally misreading the markets.  I am increasingly hearing from Wall Street that a double-dip recession is a far more immediate worry than the deficit. Of course red ink remains a long-term problem, and Congress must both cut spending and raise taxes to address it. But by slashing spending so deeply and quickly, the RSC would almost surely throw the economy back into recession.

The RSC describes this part of its plan in only one sentence: “We must implement discretionary and mandatory spending reductions that would cut the deficit in half next year.”  To do the math, the Congressional Budget Office projects next year’s deficit at about $1.1 trillion. No tax increases on anyone allowed (Heaven forbid people should get less of a government subsidy on their $900,000 beach house mortgage) so the RSC would have to cut spending by $550 billion to knock down the deficit by half. The remainder of the proposal would cap all federal spending at 18 percent of Gross Domestic Product and enact a Constitutional amendment to both enforce that 18 percent ceiling and bar any tax increases.

My Tax Policy Center colleague Bob Williams reminds me that only twice in modern history has the U.S. reduced spending by more than 10 percent in a single year—at the end of World Wars I and II. Congress did slash outlays by 10 percent in 1937-38, a time eerily like today, and we know how well that worked out.    

What would $550 billion in across-the-board spending cuts mean? A 15 percent reduction in Social Security benefits would cut monthly payments for a typical retiree by $180. It is hard to imagine the air traffic control system functioning with its budget cut by 15 percent. Does anybody think doctors would treat Medicare patients or that nursing homes would accept Medicaid residents in the wake of a 15 percent payment cut? While the RSC opposes any tax increases, its plan is silent on, say, Medicare premiums. So, it could keep provider payments flat—by doubling premiums.           

The RSC would not return my calls so there is a lot we don’t know about its  plan. If, however, it exempts defense and homeland security from deep cuts—a key element of the House GOP budget plan-- the reductions elsewhere would be even steeper.  Instead of a 15 percent reduction in spending, the RSC would have to cut everything else by about 20 percent.    

There is, believe it or not, some good news in this document. The best may be that barely 40 percent of House Republicans signed it, showing an unusual bit of discord for a group that normally governs with the same discipline that the Rockettes dance. One the other hand, 103 elected members of Congress did sign this bizarre letter. Maybe they were hoping nobody noticed, what with Anthony Weiner’s tweets and all.

14Comments

  1. David Lamon  ::  6:19 pm on June 7th, 2011:

    Spending less must start with foreign aid to all countries except Israel. Military bases across the globe must be paid for by countries we are there to protect or else bring our troops home. We can’t afford to world’s policemen any longer. Illegal invaders into our country must be cut off from all free services and sent back home.

    To not do this is to make the American people mad because they have spent their whole lives paying into the system and they get first consideration on everything.

    The EPA must be shut down and allow oil drilling anywhere it is suspected to be oil or natural gas. Judges on the far left must be impeached and replaced with conservative judges that are of the “America First” persuasion.

    Immorality must be addressed in this country or nothing else we do will matter.

  2. jonathan  ::  8:12 pm on June 7th, 2011:

    They’re trying to win elections, not actually implement these policies. They’re appealing to the irrational by portraying the problem as “government spending” and then setting aside all that is government spending except for the $600B or so that is non-defense discretionary (and taking out veterans monies, of course). So it’s utter nonsense uttered for the purpose of misleading people who want to hear nonsense uttered. It’s as silly as saying that we need to cut the deficit and be fiscally responsible while saying in the very next breath that we need to cut taxes. I read today that Pawlenty is claiming he bears the golden pork chop because his policies would generate growth of 5% a year. Maybe we should call him “Extraordinary Pawlenty” because obviously he must be gifted, either with the true golden pork chop hanging around his neck or as a really big liar.

    BTW, for the commenter above, foreign aid is not much and a big chunk of that is actually credits to our defense contractors. The money for Egypt is a bunch of credits held by Treasury and paid out to our companies. Israel gets a better deal: we invest about $500M in the Israeli defense industry, with the rest being credits paid to our contractors. Given the sharing of defense technology – and such things as the worm that infected Iranian centrifuges – maybe that investment is worth it. I can’t remember the exact amount of “humanitarian aid” compared to military aid but an idea behind military aid is our military pays somewhat less because production is spread over more units. If we stop this aid, I assume the defense industry will need to make it up (and that politically they will be able to get it.)

  3. Sid F  ::  9:27 pm on June 7th, 2011:

    I don’t see the problem. According to Tim Pawlenty we can cut income taxes, eliminate the Estate Tax, Taxes on Capital Gains, Interest and Dividends and still balance the budget by cutting spending just by 1% each year for the next six years.

    http://dismalpoliticaleconomist.blogspot.com/2011/06/tim-pawlenty-proposes-to-cut-taxes-and.html

    Really, that is what he says, and he is a top tier candidate for the Republican nomination.

  4. Michael Bindner  ::  12:57 am on June 8th, 2011:

    What provision of the Constitution gives the federal government any say in the morality of its citizens? Also, what do you mean about morality – sex only or do you include the scandalous immorality of wealth earned for doing nothing on Wall Street?

  5. Michael Bindner  ::  12:59 am on June 8th, 2011:

    The Republican Study Group is nostalgic for the days when it was in the minority and could spout crazy stuff like this. It will get its wish shortly, because the Democrats and the leadership are about to do a long term budget deal without them.

  6. Secondary Sources: Male vs. Female Income, German Example, Government Cuts – Real Time Economics – WSJ  ::  10:21 am on June 8th, 2011:

    […] […]

  7. Steve Thompson  ::  2:29 pm on June 8th, 2011:

    When the outstanding liabilities (debt) of the entitlement programs including Medicare, Medicaid and Social Security are considered, they could add up to $120 trillion to the total, resulting in a debt-to-GDP ratio of 900 percent. This is the issue that government must deal with immediately.

    Here is an article discussing this looming fiscal nightmare:

    http://viableopposition.blogspot.com/2011/04/hidden-american-100-trillion-debt.html

  8. Secondary Sources: Male vs. Female Income, German Example, Government Cuts – superworkweb.com  ::  3:37 pm on June 8th, 2011:

    […] –Government Cuts: Howard Gleckman warns that very large, immediate cuts to government spending is a prescription for a double-dip recession. “Apparently nostalgic for recession, more than 100 House Republicans have proposed to cut federal spending by $550 billion in 2012. The Republican Study Committee (RSC) doesn’t ever quite say this is their plan, but it is. One hardly knows where to begin. This is an amazing number. It implies a 15 percent reduction in government spending in a single year—in the midst of a weak economy with unemployment that exceeds 9 percent. It is an austerity budget of historic proportions. Just to compare, the United Kingdom is moving to cut spending by 20 percent over four years. The House Republican budget devised by Budget Committee Chair Paul Ryan (R-WI) would cut 2012 spending by about 3 percent or $110 billion. The RSC would make Ryan look like a crazed liberal. Of course, that may be the idea.” […]

  9. Robert  ::  1:22 pm on June 13th, 2011:

    Only an idiot would believe that money paid to employees on Wall Street is for doing “nothing.” You are either extremely ignorant of what workers on Wall street do, or you are just extremely biased. I’m guessing a sprinkling from each column. Nothing like bold assertions about large swaths of the economy that sound like a 2 year old throwing a tantrum.

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