The Not-Fated Economic Recovery
I’ve seen a spate of stories recently suggesting that a economic recovery is fated to happen by 2013, and whoever wins the Presidential election will be able to claim the mantle of the “recovery President.” This is far too deterministic a take for me. There is such a thing as a business cycle, but to suggest that national policy cannot dislodge it ignores history. Even recent history.
In 2009 it looked as if the next Prime Minister of Britain would be able to take credit for a recovery. Then David Cameron installed an austerity regime and the economy stalled. So there’s no question that the actions of the federal government can and will have an impact on any economic recovery, especially at a time when demand remains slack and monetary policy is at the zero bound, and with a Federal Reserve Board of Governors unwilling to risk inflation even slightly above the target level.
I’m assured by some wags that Obama would not install Cameron-like austerity, and Romney would usher in a tax-side stimulus that, while, clunky, would increase GDP. This ignores the other side of his policy prescriptions, the cap on federal spending, which Jonathan Cohn takes a look at.
Start with some budget math. Romney . . . has vowed that, by 2016, he would cap federal spending at 20 percent of gross domestic product while maintaining defense spending at 4 percent of GDP. That means he would limit all non-defense spending to 16 percent of GDP.
The latest Congressional Budget Office projection suggests that GDP in 2016 will be $19.1 trillion. Sixteen percent of that is about $3.1 trillion. But, based on CBO figures, non-defense spending will be about $3.6 trillion in 2016. So to meet his goals, Romney would have to cut non-defense federal spending in 2016 by roughly $500 billion.
Romney doesn’t deny this. On the contrary, he’s been refreshingly honest on this subject. In the Washington D.C., speech where he laid out his budget vision, he said “we’ll need to find almost $500 billion in savings a year in 2016.” But Romney has not given many details on what that would entail. (Nor did his campaign respond to questions about this from TNR.) Perhaps that’s because the impact of these cuts would scare the bejeezus out of some people.
That works out to a 14.1% reduction in spending within 3 years, and if Social Security and Medicare get exempted, 25%. This cannot get entirely backloaded or washed away with a gimmick. And most important, those cuts would be put on top of the already contractionary federal fiscal policy set to start in Fiscal Year 2013. As Cohn points out, the Center on Budget and Policy Priorities estimates that non-defense discretionary programs will be cut by 17 percent of the current baseline by 2021. Romney wants to add another 14-25% cut to this.
The cuts we will already experience in FY 2013 will reduce GDP by as much as 1.5% according to a recent analysis from Goldman Sachs. So any tax cuts would have to make up for all of this. Only it can’t, because Romney would also pursue a balanced budget, meaning that the tax cuts will have to get offset somewhere else. And all of this budget-related stuff can get done through reconciliation – it’s what reconciliation was designed to accomplish – so if Romney has a Republican Congress (and if he wins, presumably it will be a good night for the GOP), he won’t have much problem getting his budget vision through.
So no, I don’t think that there’s an automatic recovery waiting for the next Presidential term, and that the next President need only bask in the glory of falling unemployment rates. Lots of decisions between now and then will set the course ahead.