The Coming Double Dip
The debt-ceiling compromise will do nothing to prevent the economy from tumbling into a second recession.
What does the last-minute deal to raise the debt ceiling do to aid the flagging, faltering economy? Nothing.
The economy is in appalling shape. Last week, the Commerce Department's latest estimate of economic growth left many economists agog. In the second quarter, the economy grew at an annual rate of 1.3 percent. In the first, it grew at an annual rate of just 0.4 percent, a figure revised down sharply from previous estimates. Based on the first six months of 2011, the economy is growing less than 1 percent per year, about one-third of the speed we would expect during a normal expansion. In short, the recovery has completely stalled and the economy is perilously close to double dipping back into recession.
Those horrid growth figures are magnified by horrible jobs figures. Currently, 14.1 million Americans are out of work. Millions more are underemployed, discouraged from hunting for jobs, or "missing" workers who have elected not to enter the labor market. Even if the economy suddenly starts growing at the pace of the 2002-07 expansion, the unemployment rate would not drop to its prerecession level of 5 percent until 2018.
But the debt deal pays no attention to the unfolding catastrophe in the real economy. The deal's major accomplishment, as touted by the White House, is hardly an accomplishment at all—merely an admission that Congress has probably avoided doing too much damage during this idiotic debate. "Independent analysts, economists, and ratings agencies have all made clear that a short-term debt limit increase would create unacceptable economic uncertainty by risking default again within only a matter of months and as [Standard & Poor's] stated, increase the chance of a downgrade," the White House noted. "By ensuring a debt limit increase of at least $2.1 trillion, this deal removes the specter of default, providing important certainty to our economy at a fragile moment." In other words, a round of applause: Congress has probably managed to shoo away the shadows that Congress itself cast.
And many analysts argue that the debt compromise might actually do the economy harm by cutting government spending while the recovery is still soft and reducing investment in research, education, and infrastructure. Paul Krugman, perhaps the Obama administration's most trenchant critic from the left, argues that point. "It will damage an already depressed economy; it will probably make America's long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status," he writes.
More moderate prognosticators agreed. "When you look at the debt burden, there is a numerator and a denominator. We may end up creating so much damage to the denominator, which is growth of GDP, that what we do in the numerator, reducing the debt, may end up being insufficient," Mohamed El-Erian, the CEO of PIMCO, told Bloomberg.
To be fair, the bill does backload its cuts toward the end of the 10-year budget window, meaning that the real deficit-cutting may happen when the economy is stronger than it is right now. According to the Congressional Budget Office's scoring of the legislation, the deal cuts just $25 billion from the 2012 budget and $47 billion from fiscal year 2013. That is not much, given that the government allots about $1.3 trillion per year to discretionary spending.
But considering how close the economy is to a double dip, these small short-term cuts might be enough to kill the recovery. The Obama administration failed to get its most effective, most desired stimulus measures written into the final compromise, despite months of wrangling. The deal lets the payroll tax cut and the federal extension to state unemployment benefits expire, even though the economy—particularly the labor market—has not really improved since those measures were enacted. Not extending the unemployment benefits alone might shave enough from GDP to send the economy back to scratch growth. Today, the Center on Budget and Policy Priorities estimated that not extending federal benefits will cut $60 billion in annual spending. If you presume that each dollar of unemployment insurance boosts GDP by $1.60, that alone smacks 0.5 percent off of GDP.
When confronted with that fact, members of Congress shrug. My colleague Dave Weigel asked Senate Budget Committee Chairman Kent Conrad, D-N.D., about the discretionary spending cuts, and whether they threaten growth and jobs. "Sure they do," he answered. "Now, what we don't know is: What will the offset be of improved certainty and confidence? And we'll just have to see." The White House, for its part, says it now plans to "pivot" to jobs, with the debt ceiling and compromise bill out of the way. But the debt ceiling debate seems to have proven that no stimulus measures can make it through this Congress. How could they, if a conservative bill containing all cuts barely managed to squeak through?
Annie Lowrey, formerly Slate’s Moneybox columnist, is economic policy reporter for the New York Times.
Photograph of job applicants by Comstock/Thinkstock.