From Josh Bivens at the Economic Policy Institute’s Working Economics Blog:
A bit over four years ago, the U.S. economy threatened to breach the legislated (and totally arbitrary) national debt ceiling. There was no economic sign (high interest rates, for example) that argued that public debt was too high, and there were many economic signs that such debt was actually too low. Yet because of a quirk in American economic policy, Congress must periodically act to raise the nominal value of the debt allowed to be issue by the federal government. This is normally a pro forma vote, at least after members of Congress are allowed to rail against what they see as the fiscal policy failings of the current president.
But in August 2011, in an unprecedented breach of Congressional norms, Republicans in Congress instead used the looming breach of the debt ceiling to demand spending cuts. Besides breaching legislative norms, the resulting cuts were also economically disastrous. The Budget Control Act (BCA) of 2011 and the resulting spending austerity (often short-handed not quite accurately as “the sequester”) fully explains why the U.S. economy has yet to reach a full recovery from the Great Recession, even more than six years after the recession officially ended. If we had instead simply followed the average path of federal spending that characterized all previous post-World War II recessions, the U.S. economy would be at full employment by now, and the Fed would have certainly begun raising interest rates a long time ago.
The fiscal drag resulting from the sequester relented a little in the past two years, as the result of a compromise reached between the House and Senate budget committees. But this compromise only rolled back sequester cuts for two years. For fiscal year 2016, the Congressional Budget Office estimates that not extending this compromise and instead returning to 2011 BCA spending targets could cost as many as 800,000 jobs as these cuts drag on aggregate demand.
One would think that loosening this coming fiscal drag would be a high priority for policymakers. Instead, the Republican Study Committee (RSC), a bloc of conservatives in Congress, has made replaying the 2011 debt ceiling crisis a top priority. With their “Terms of Credit Act,” they are demanding cuts over and above the return of sequester level spending levels as just one of many concessions that need to be made to convince them to raise the debt ceiling. The general cuts it demands are $3.8 trillion in cuts to mandatory spending over the next 10 years. Though, as Senator Sheldon Whitehouse pointed out in a hearing today, they are not even serious enough about these cuts to actually identify what should be cut. Instead, it’s simply vague line-items placed next to various congressional committees.
We can, however, get a sense of the lower bound of the fiscal drag that would result in the next year if the RSC proposals were actually put into effect—it’s very roughly $130 billion (add up “resolution changes” in Table 14 here). For next year, this would constitute a very large fiscal drag, something on the order of 1 percent slower GDP growth and 1.1-1.2 million fewer jobs created through the year (for context, job growth in all of 2015 so far has been just under 1.8 million jobs).
Luckily, nobody really takes the RSC that seriously, and the Obama administration has so far signaled that they will reject even the fiscal drag resulting from a snapback to sequestration spending levels, and has not even addressed the truly absurd second layering of cuts called for by the RSC. But it’s a useful reminder that to some in Congress, the 2011 debt ceiling crisis and resulting austerity that has resulted in slow growth and unnecessary economic pain for millions is a model, not a cautionary tale.