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rant

on budgets and deficits

In the course of a year or two, the top political priority in Washington has shifted from "get Americans back to work," to "cut the deficit," to "cut spending." I'm wondering about the relationship among those three things.

If you cut (say) $38 billion from a six-month budget, that's the equivalent of $76 billion in an annual budget. I don't know where that money is coming from, but I think it's a safe bet that most of it, one way or another, is somebody's salary. If the average "somebody" involved earns $76K/year (including benefits), that's the equivalent of laying off a million people from their jobs. Of course, if there were a seller's market in labor, many of those people would move into private-sector (aka "real", in Republicanspeak) jobs. But there isn't: there's a high unemployment rate, so most of those laid-off people are going to the unemployment rolls instead, raising the unemployment rate by about a percentage point; others will go into private-sector jobs, with the (short-term) side effect of depressing wages for everybody else in comparable private-sector jobs. In other words, cutting government spending is fairly harmless if unemployment is already low, and harmful if unemployment is already high.

[ETA: I hear now that of the $38 billion figure, only a few hundred million are actually saved this year; the rest is saved from projected spending over the next several years. Which means it's more like laying off a hundred thousand people, not a million.]

What's the effect on the budget deficit? Well, you immediately lose the 20% or so of those people's income that they were paying back to the Federal government in income taxes (c. $15 billion), so it really only saves you about $60 billion. They're also paying less in state and local income taxes, state and local sales taxes, etc; call this another $15 billion in lost tax revenue. This doesn't directly affect the Federal budget deficit, but most of those state and local governments are extremely budget-strapped too, and many of them don't have the option of deficit spending, so they HAVE to either raise taxes or lay off workers themselves -- which again cuts Federal, state, and local tax revenues. And the laid-off workers are now drawing unemployment insurance, Medicaid, WIC, and other income-based entitlements that they didn't need before; let's say that adds another $15 billion to deficits (between Federal, state, and local). And, of course, all the laid-off workers are now spending less money in the local economy, which comes out of their neighbors' salaries, so THEY pay less in income taxes too.

We know that "money in people's pockets" has a multiplier effect on local economies, as each dollar is involved in several transactions before settling down in long-term assets. If the average American has a marginal tax rate of 25% (that's MARGINAL tax rate, how much of each additional dollar goes to taxes, not how much of your entire income goes to taxes), and the multiplier is about 2, then cutting government spending by $100 billion worth of salaries would actually cut the deficit by about $50 billion. If the multiplier is about 4, then it wouldn't cut the deficit at all. If it's about 5, then cutting government spending would actually INCREASE the deficit.

But Republicans aren't really interested in cutting deficits (as witness the G. W. Bush years); that's just a codeword for cutting government as an end in itself. For which there may be legitimate arguments, but let's be honest about it: cutting government spending in a recession isn't about the deficit, it's about cutting government spending.

Comments

I'm assuming it wasn't the defunding of anything related to women's reproductive freedom--if it were, I'd've had e-mail blasts from Planned Parenthood and NARAL by now....
The defunding of the Corporation for Public Broadcasting (which funds part of NPR, PBS, etc.) was taken out of the bill. The provision on
abortions in Washington, DC was taken out of the bill. The ban on the
EPA regulating greenhouse gases was taken out of the bill. The
elimination of the Federal family-planning program (which, I'm
guessing, includes funding to Planned Parenthood) was taken out of
the bill. In exchange, a lot of other things were cut more deeply
than the D's wanted.

Every one of the above topics will probably be reintroduced in a few
weeks once they start talking about NEXT year's budget.
Correction: the provision on abortions in Washington, DC was kept in the bill: it's not even Federal government money, but local taxes that are now not allowed to be used for abortions. Obama and the Democrats caved on that one in order to get an agreement.
Now, you see, there you go, being all *factual* and stuff...I mean, didn't we learn from John Kyl just this weekend that it's OK to just make shit up to prove your point?

Your budgetary analysis makes sense, and in fact parallels what the CBO has been saying (and has been ignored soundly) for some time. Since the CBO is *gasp* a _Governmental Agency_, nothing it says can be trusted by the Republicans. Unless, of course, it said something they wanted to hear.