Horrible debt deal could lead to double-dip recession

By John Burbank

Can we all breathe a sigh of relief now that Congress has passed and the President has signed the increase in the debt ceiling combined with trillion dollar budget cuts?  After all, it seems like sanity prevailed!

That would have been the case if Congress has simply passed an increase in the debt ceiling.  It didn’t.  What we got was a package of bad policy gift-wrapped in rosy rhetoric from the President and the Congress.  What we will get in the next year is a stagnating economy, increased unemployment, and a growing federal deficit.  How’s that?

The deal cuts $7 billion from federal spending starting in October.  That translates to about 150,000 lost jobs, when you account for both the direct jobs held by civil servants and government contractors, and the jobs created when they spend their paychecks.  Then it cuts another $3 billion in government services in the next year.   Pile that on top of the national and Washington state unemployment rate of 9.2%, and King County unemployment rate almost touching ten percent, and you have the recipe for increasing unemployment and decreasing hope.

It doesn’t help that our economy grew by just one percent on an annual basis for the first six months of this year.  That doesn’t keep up with population growth and it doesn’t make up for the trillions of dollars that “disappeared” when the economy initially tanked in 2008 and 2009.  In our state alone, one result is that we have 150,000 fewer jobs than before the recession.

So now is not the time to cut back on government services.  We need them more than ever.  We need them to cushion the impact of this continuing stagnation on working and unemployed people, with unemployment insurance, food stamps, and Medicaid.  And we need the jobs other federal services require, whether those are at NOAA on Lake Washington, or local Social Security offices.  But don’t count on them.   Funding for these services is now a case of musical chairs.

It gets worse. The deal cuts $1 trillion from federal programs in the next ten years.  On top on this, it empowers a “super-Congress” of 12 legislators to reduce the federal deficit by another $2.5 trillion, through spending cuts, including possible cuts to Medicare and Social Security.  (They call this entitlement reform, but actually it is simply taking away benefits we all worked for.)

Congress and the President have engaged in a charade of rhetoric. They say, as if it was a good thing, that they will cut government spending.  Would that be cutting the Food and Drug Administration, that tests and guarantees drug safety and effectiveness?  How about the forest fire fighters in the national forests?  Maybe we could just let those fires burn out of control.  How about the Federal Aviation Administration?   Surely we don’t need air traffic controllers to land planes….  Or just cut Social Security payments, now that we have seen the bottom drop out of our private retirement plans.  Sure, cut the only sure bet for economic security in old age….

But the most damning thing about the deal is that it won’t work.  It won’t do what it says it will do.  It is based on fairy tales of economic growth which remain illusions.  For example, the Congressional Budget Office forecast a 3 percent growth in the GDP this year.  Thus far, it is coming in at 1%.

Numbers like these mean that the deal will deepen stagnation and lead us into a double-dip recession.   As a result, tax revenues will decline, because there will be fewer jobs, less out-of-pocket consumption, and less income.  At the same time, the need for essential supports, such as unemployment insurance, health care, and food stamps, will increase, increasing government spending.  So we will see a bigger federal deficit sooner.  One that could actually force Congress and the President to again raise the debt ceiling before the next election, which is exactly what they wanted to avoid.

John Burbank is the executive director and founder of the Economic Opportunity Institute in Seattle. He can be reached at john@eoionline.org.