Business

12.11.13

With the Ryan-Murray Deal, Washington Stops Hurting the Economy

A bipartisan proposal to trim the sequester and forbid shutdowns for the next two years means Washington may finally be ready to quit kneecapping growth.

On Tuesday, Rep. Paul Ryan and Sen. Patty Murray announced a budget deal. Should it pass, the deal would undo a portion of the sequester and raise discretionary spending in fiscal 2014 by $45 billion, from the sequester level of $967 billion to $1.012 trillion. It would offset the spending increases slated for the next two years with new revenues raised from jacking up airline ticket fees and boosting federal employees’ pension contributions.

Political analysts have been wondering whether this betokens a new era, in which House leadership finally tells the Tea Party caucus to take a hike. And economic analysts are asking whether, after years of erecting stumbling blocks to growth, Washington is finally getting out of the way.

There’s no question that in the last few years, government austerity has weighed on growth. Federal spending has fallen for two straight fiscal years, even as receipts have risen sharply. That has helped make this the Golden Age of Deficit Reduction. But progress on the deficit has come at a price. Each quarter, when it reports the Gross Domestic Product figures (PDF), the government goes through and tells us how much each sector added to (or detracted from) growth in a given quarter. In nine of the last 12 quarters, and in the past four running, the federal government has been a drag, reducing the growth rate by anywhere from .1 percent to 1.19 percent. Increasing spending, even by about $45 billion per year, would mean that in coming quarter, the federal government would add to growth. Not enough to make the difference between recession and expansion, or between excellent growth and meh growth, to be sure. But it would turn a major headwind into a minor tailwind.

Boosting spending and undoing a chunk of the sequester is likely to have a bigger impact on the still-ailing job market. As we’ve long noted, this is a “conservative recovery”. The private sector has been adding jobs every months for the last few years while the public sector has been cutting them. That doesn’t typically happen during expansions. Since 2010, the public sector has cut 1.134 million positions, with the federal government accounting for more than 700,000 of those cuts. (Note: some of those cuts in federal government employment are due to the layoffs of workers hired to conduct the census.)

In recent months, as state and local government finances have improved, states and cities have stopped cutting and started adding employees. Since January, state and local government employment has risen by 87,000. But thanks in part to the sequester, federal employment has continued to trend down through 2013. Compared with January, there were 88,000 fewer federal employees in November. We don’t need the federal government to start massive make-work job programs. We just need it to stop laying people off and furloughing them, and to start hiring (or re-hiring) a modest amount of workers each month. Doing so would make the job market a little bit tighter, boost payrolls, provide a modest amount of upward pressure on wages, and help coax a few more people off the sidelines and back into the labor market.

An increase of $45 billion in spending isn’t exactly New Deal 2.0.

Then there are the less tangible impacts even this small deal will have on consumers’ and businesses’ confidence. Since the summer of 2011, Washington has been lurching from one manufactured economic crisis to another: threatening a debt default, shutting down the government, furloughing employees and cancelling contracts. These sort of arbitrary and draconian events tend to put a chill on economic activity and make those affected think twice about investing and spending. The Gallup Economic Confidence Index went into a deep rut during the shutdown in October and is only now regaining its pre-shutdown levels. People are much more reassured by functionality than by dysfunction. So at the margins, the Ryan-Murray deal is likely to boost confidence and sentiment. Should it pass, the U.S. would have a real budget for the next two years while forestalling any possibility of a shutdown. And the newfound comity in Congress might ease the path for raising the debt ceiling early next year with a minimum of drama.

But we shouldn’t get too excited. An increase of $45 billion in spending isn’t exactly New Deal 2.0. We still don’t have a much-needed infrastructure spending bill. And Congress, even as it giveth, will taketh away: extended unemployment benefits for those hit hard by the recession are set to expire in January. Since the deal excluded an extension of those benefits, about 1.3 million people are set to lose a vital form of income support in a matter of weeks. Food stamps have already been cut, and congressional Republicans are hell-bent on cutting them further. The combination of those two actions will reduce the spending power of those at the lower rungs of the income ladder, and will negate a portion of the gains reaped from easing the sequester.

Even so, we should applaud this very small-bore deal. After a few years in which Washington has exerted a malign force on demand, it is showing signs of becoming a neutral force. We’ll take what we can get.