Experts: House Budget Spurs Growth, Senate Version Spikes Debt

Posted: Mar 20, 2013 12:36 PM

The House of Representatives is expected to take up Paul Ryan's budget today, as the Senate begins debate on Democrats' first fiscal roadmap in nearly four years.  The House GOP version balances in ten years, without raising taxes, by reducing the rate of spending growth and reforming entitlement programs.  Senate Democrats propose $1.5 trillion in tax increases and hundreds of billions in phony savings, yet their ledger never approaches balance.  The president's offering is still nowhere to be found.  Ryan's plan would shave $4.6 trillion from deficits over ten years, compared to the current spending path; the Reid/Murray approach actually raises overall spending by hundreds of billions.  As these contrasting paths forward are discussed on Capitol Hill, read through this Wall Street Journal op-ed by two Stanford University economists.  They argue that their thorough analysis suggests that the House budget would boost the economy and inspire confidence in American employers, investors and creditors:

According to our research, the spending restraint and balanced-budget parts of the House Budget Committee plan would boost the economy immediately. With the Budget Committee's proposed tax reform included, the immediate impact would be even larger. The entire plan would raise gross domestic product by one percentage point in 2014, equivalent to about a $1,500 increase for each U.S. household. Ten years from now, at the end of the official budget horizon, we estimate that the entire plan would raise GDP by three percentage points, or more than $4,000 for each U.S. household...

The long-run economic gains from restraining government spending would not, despite what critics claim, harm the economy in the short run. Instead, the economy would start to grow right away. Why?  First, the lower level of future government spending avoids the necessity of sharply raising taxes. The expectation that tax rates won't need to rise provides incentives for higher investment and employment today. Second, since the expectation of lower future taxes has the effect of raising people's estimation of future disposable income, consumption increases today. This change comes thanks to Milton Friedman's famous "permanent income" hypothesis that the behavior of consumers reflects what they expect to earn over a long period. According to our macroeconomic model, the higher level of consumption induced by the House budget's effect on consumer expectations is large enough to offset the reduced growth of government spending.

Third, the new budget's reduction in the growth of government spending is gradual. That allows private businesses to adjust efficiently without disruptions. Still, our macroeconomic model likely underestimates the positive impact of the House budget plan. The model doesn't account for the greater economic certainty that results from preventing the national debt from soaring to dangerously high levels and from stabilizing the federal tax burden.

Meanwhile, what would the Senate budget accomplish?  Ta da:

Republicans on the Senate Budget Committee summarize many of the budget gimmicks we've covered and conclude that Democrats' plan amounts to "virtually no deficit reduction whatsoever" -- a far cry from Murray's claim of $1.85 trillion in lowered deficits:

Even the claimed deficit reduction is a fallacy because it relies on several egregious gimmicks and accounting tricks. The largest such gimmick is that the budget eliminates the sequester but does not count the elimination of these cuts as the spending increase that it is. (Chairman Murray’s staff conceded under questioning that, properly accounted, their actual deficit reduction would be closer to $700 billion.) Other gimmicks further reduce that figure, including an unrealistically low estimate of war spending and a doc fix that is assumed but not paid for. Altogether, the Senate Democrat budget contains virtually no deficit reduction whatsoever. Underneath all the gimmicks and spin is more a fundamental issue: what’s actually in the Murray budget? What are the actual policies and reforms? They don’t exist. The never-balancing budget contains no actual fiscal reforms of any kind—just a massive tax increase to fuel a massive increase in government.

Over the coming weeks and months, the two parties will battle over ownership of the word "balance."  Democrats will embrace the president's definition: A political euphemism for raising taxes in exchange for any spending "cut," no matter how counterfeit.  Republicans will promote their actually balanced budget.  This is a fight the GOP believes it can win because balanced budgets are widely popular, even among many Democrats:

But the message of bringing the federal government’s books into balance — the central idea behind the Wisconsin lawmaker’s 2014 spending plan — was quietly tested in 18 competitive House races in a late-February poll by the National Republican Congressional Committee. It was a winning argument across a broad swath of politically moderate — and nearly split — districts…When talking about the Democrats’ plan, Republicans criticize it for attempting to raise taxes and the fact that it doesn’t balance the budget. Republicans say they’re trying to seize the message “balanced” back from President Barack Obama, who said last week he doesn’t consider balancing the budget a top priority. The internal party polling shows that Republicans think there’s massive political upside to talking about balancing the budget… The poll showed that 45 percent of Democratic voters think “balancing … the federal budget would significantly increase economic growth and create millions of American jobs.” A sky-high 61 percent of independents and 76 percent of Republicans agree.

Jim Pethokoukis is skeptical of Republicans' substance here, suggesting that their balanced budget is more of a messaging tool than an airtight set of policies.  Fine.  This budget has no chance of becoming law with Harry Reid and Barack Obama standing in the way, so why not try to win some narrative fights for once -- especially while pursuing generally sound policies and goals?  Whether Republicans can stay on message is another story, though yesterday's budget press conference was a decent start:  

At the very least, they successfully coordinated tie colors, in honor of St. Patrick's Day.

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