How the Budget Debate Could Help the Economy

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

I remain truly and deeply disturbed by the immediate pivot from the debt-ceiling debacle and government shutdown to yet another set of budget negotiations, with not even a head fake toward dealing with the slogging economy.

Still, is there any lemonade to be made out of this lemon of a budget conference that’s about to get under way? I think there is.

First, it is a good sign that all sides are eschewing the elusive “grand bargain,” in which the Democrats accept significant cuts to entitlements and the Republicans accept significant new tax revenues. That’s good news, because that route leads to gridlock â€" and presents a real risk of reducing essential income and health supports for economically vulnerable retirees and others who depend on Social Security, Medicare and Medicaid.

On this latter point, while there are obviously wealthy beneficiaries of Social Security and Medicare who would be fine without those programs, far more depend on them. Kathy Ruffing, a colleague at the Center on Budget and Policy Priorities, points out that excluding Social Security benefits, the poverty rate among the elderly would be an astounding 44 percent. Including those benefits, it is 9 percent. They lift 22 million people out of poverty.

In the hands of this Congress, a “grand bargain” could easily be a disaster for these folks.

Second, there seems to be a bit of a consensus forming around replacing some of the sequester cuts that are partly responsible for the fiscal drag that’s been dampening economic growth. To remind you, sequestration is indiscriminately lowering both defense and non-defense discretionary spending by $109 billion per year.

The Congressional Budget Office recently estimated that those cuts will cost the job market around 800,000 jobs by the end of next year. So replacing some or all of the cuts would surely help. The question is: replace them with what? Tax revenues are most likely off the table (though at least one prominent Republican member gave an opening on revenues Friday), and replacing one set of cuts with another shouldn’t be expected to do much good.

Unless, that is, we back-load the replacement cuts. Replacing a year (two would be better) of sequestration cuts with cuts that unfolded over many more years would be helpful both to the current economy and to deficits in future years.

But there’s an important wrinkle. The replacement cuts will most likely have to come from the mandatory side of the budget, which includes entitlements. Now, there are definitely entitlement savings â€" say, from Medicare â€" in the president’s budget that do not affect beneficiaries, like reducing the amount that Medicare spends on drugs by allowing the program to use its clout to get better bargains from drug companies. And there’s other wasteful spending on this side of the budget, like farm subsidies, that could also contribute.

While Democrats should be open to this kind of trade-off, they should do so only to replace non-defense cuts. Here’s how Bob Greenstein of the Center on Budget and Policy Priorities put it the other day:

“I’m comfortable in replacing some or all of non-defense cuts with well-designed savings from mandatory programs like entitlements, but not on the defense side â€" one doesn’t want to create a precedent for undoing defense sequestration with domestic entitlement cuts.”

If Republicans want to replace sequestered defense spending, be my guest: go find some new tax revenue, close a loophole, whatever. But no entitlement cuts, even inoffensive ones that don’t ding beneficiaries, to replace defense cuts.

So, I know this is all pretty down in the weeds, and I also know that by sounding a bit optimistic about a deal like this, I’m seriously lowering expectations. So let me be very clear: all we’re talking about here is bending ourselves into a fiscal pretzel to undo some of the damage the Congress has already done. No one should mistake any of this for actually tackling the real economic challenges we face.

But if the parties can agree to offset a year or two of sequestration with back-loaded savings that protect economically vulnerable beneficiaries, and if they can get to all this while cordoning off the radical right who are probably eager for another shutdown or default threat â€" well, in today’s benighted Washington, that would actually be an advance.