By Ignoring Economic Reality, Ryan Budget Would Slow Recovery, Cost Jobs

Earlier today, House Budget Committee Chair Paul Ryan (R-Wis.) unveiled the House Republicans’ fiscal year 2015 budget resolution. Like Chairman Ryan’s FY14 budget, this year’s model (again called “The Path to Prosperity”) aims to balance the budget within a decade—an economically nonsensical goal during a slow recovery, and one that requires damaging austerity to achieve.

In many respects, the austerity Chairman Ryan calls for this year is even more painful than in previous years. This is because Ryan is stubbornly hanging on to his goal of balancing the budget amid changing economic and political conditions, including a downward revision of $1 trillion in projected revenues over ten years and a deal he made with Senate Budget Committee Chair Patty Murray (D-Wash.) to not change discretionary spending levels in FY15 (creating the need for more draconian cuts throughout the ten-year “budget window”), as well as an unbending refusal to increase revenues.

Five years after the end of the Great Recession, our economic recovery is plodding, not because of massive deficits (which are not currently massive—they have fallen faster than at any point in the last 60 years), but due to a lack of aggregate demand. In a demand-starved economy like ours, public spending has a high multiplier effect, meaning that for each dollar the government spends, more than a dollar is added to the economy. This is especially true when that public spending is allocated in such a way that it can circulate quickly throughout the economy—for example, through low-income support programs (which are automatic stabilizers) or infrastructure investments that would create jobs rapidly.

For that reason, pulling back spending in today’s economic environment, as Chairman Ryan proposes, would have a deleterious effect on the economy and jobs. On net, I estimate that the House budget resolution would decrease GDP by 0.9 percent and decrease nonfarm payrolls by 1.1 million jobs in fiscal year 2015, relative to CBO’s current-law baseline. The following fiscal year, when Ryan’s cuts to discretionary spending kick in, “The Path to Prosperity” would decrease GDP by 2.5 percent and cost 3.0 million jobs. And if the recovery remains sluggish, large job losses could continue under the Ryan budget in 2017 and beyond.

To take the “path to prosperity” would be, in reality, to steer away from a full employment economy. In FY15, the Ryan budget would increase the “output gap”—the difference between our current economic output and the highest level of output that could be achieved before causing inflation to rise—to 3.6 percent from a currently projected 2.7 percent. (The methodology behind all of these numbers is explained here. In future blog posts, EPI will compare the macroeconomic and labor market effects of the Ryan budget to the administration’s budget, the Congressional Progressive Caucus’s budget, and other forthcoming budget alternatives.)

As in years past, Chairman Ryan’s budget ignores the overwhelming evidence that slashing public spending during a slow recovery will not return the economy to health. However, this year, in order to mathematically achieve a balanced budget within a decade, Chairman Ryan adds a “macroeconomic fiscal impact” line item, positing that cutting the deficit would, over the medium term, boost the economy. While shrinking the deficit may indeed boost economic growth when the economy is running near or at its potential, that simply will not be the case under Chairman Ryan’s near-term austerity. (And in the current economic environment, Chairman Ryan’s causal relationship backward; depressed economies that grow quickly see their deficits fall, not the other way around.)

While other commenters are sure to delve into the House budget resolution’s gimmickry (repealing Affordable Care Act spending programs but not the associated revenues), unfairness (decimating Medicaid and the Supplemental Nutrition Assistance Program by transforming them into block grants; adding $483 billion to the Pentagon’s budget over ten years while cutting $791 billion from all other discretionary functions, compared to the current spending caps), and opacity (calling for revenue-neutral tax reform but declining to say how that can be achieved while dramatically decreasing top marginal rates), perhaps the most egregious part of “The Path to Prosperity” is the perpetuation of the idea that cutting spending will bring our economy back to health.

Simply put, austerity is dangerous. While projected federal deficits in future decades are and should be a concern over the long term, implementing austerity now—in the midst of a demand-starved recovery—would stall economic growth and cost jobs.