Skip to main content

Democrats lose on budget deal

By Rick McGahey and Teresa Ghilarducci
December 13, 2013 -- Updated 1519 GMT (2319 HKT)
STORY HIGHLIGHTS
  • Democrats and Republicans reach a deal on the budget
  • Rick McGahey, Teresa Ghilarducci: Austerity in budget will hurt our economy
  • They say President Obama should not make cuts to programs like Social Security
  • McGahey, Ghilarducci: Taxing the wealthy would generate revenue and cut deficit

Editor's note: Rick McGahey is professor of professional practice in Public Policy and Economics at The New School. He served as assistant secretary for policy at the department of labor in the Clinton administration. Teresa Ghilarducci is director of the Schwartz Center for Economic Policy Analysis at the New School. She was on the Pension Benefit Guaranty Advisory Board in the Clinton administration.

(CNN) -- To resolve America's ongoing, bruising battle over the debt and deficit, House Republican Paul Ryan and Senate Democrat Patty Murray announced a deal on December 10 to halt spending cuts -- mostly in defense -- and lock in a two-year budget agreement to avoid another government shutdown on January 15.

But in eagerly seeking agreement with the Republicans who shut the government down in October, Democrats risk hurting the economy's fragile recovery by accepting too much budget austerity embedded in the newly adopted budget.

President Obama and the Democrats won big over the Republicans in October's budget fight. Instead of pressing their advantage, Democrats took tax increases for the rich off the table, agreed to cut federal pensions and did not get unemployment benefits extended. The Democrats basically threw away their political gains.

Rick McGahey
Rick McGahey

The deal repeals less than half of the sequestration cuts planned for 2014. If Obama and Congress continue their shortsighted obsession with austerity and budget cuts, they ignore the big economic lesson from the past several years: Austerity hurts prosperity.

Teresa Ghilarducci
Teresa Ghilarducci

The Congressional Budget Office estimated that repealing the entire 2013-2014 spending cuts would increase Gross Domestic Product by $113 billion and create 900,000 additional jobs next year. The October 2013 government shutdown took another $24 billion out of the GDP. Unemployment remains stuck around 7%. Though the deal reduces a bit of fiscal uncertainty, it hardly affected the U.S. growth forecasts for big banks, despite bank economists citing some pessimism because of "austerity shock" from spending cuts and "uncertainty shock" from Washington's continued fiscal battles.

Republicans bargain for more cuts and fewer taxes, but cutting military spending makes them nervous, so they attack Social Security and Medicare. The Wall Street-affiliated Democratic group Third Way is helping. It launched an attack on Sen. Elizabeth Warren, D-Massachusetts, and others who rightly refuse to cut Social Security as part of a long-term budget solution.

We all know that Republicans like to defend the wealthy and slash government. But why does austerity, especially cuts to old-age programs, have credibility with Obama and other Democrats?

Boehner: The far right is using Americans

Advocates of "grand bargains," cutting programs to balance the budget, wrongly presume the budget is a fixed quantity. They imagine it like a fixed pie. Programs for the young, like education, must be paid for by cutting other programs, like Social Security. But their belief that a dollar taken from the old will be spent on the young is not only divisive, mean and fierce -- it is wrong.

In his December 6 speech on inequality, Obama talked about the sky-high and stubborn child poverty rate: more than 24%. But cutting Social Security and Medicare will only destabilize the economy and increase the elderly poverty rate.

In many countries, programs for elderly people are not traded off against help for the young. When support for old-age programs increases, so does spending on children. Advanced democratic countries' spending on the elderly is positively correlated with education spending. One analysis shows that a 10% increase in spending on education is correlated with a 7.3% increase in spending on pensions.

The Congressional Budget Office warns that long-term deficits can hurt the economy. Want to reduce the debt and deficit? Tax the wealthy, which won't hurt the economy. Economists Emmanuel Saez and Thomas Piketty estimate that raising the tax rate for the top 1% as high as 80% would generate far more revenue.

Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Oregon, propose a transactions tax -- a three-penny charge on every $100 traded in the stock market, which the Congressional Budget Office estimates would raise $352 billion over 10 years. This small tax would also reduce stock churning by speculators, creating a nice secondary benefit.

Want to find even more savings? Sen. Harry Reid, D-Nevada, wisely put tax loopholes that cost the Treasury almost a trillion dollars per year on the table. For example, Reid called for eliminating the small, but noxious, tax break for buying yachts and the $17 billion break that comes from taxing private equity, real estate and hedge fund profits as "carried interest" rather than at the ordinary income rate of 39.6% instead of the capital gains rate of 20%.

There is one piece of good news: The deficit is coming down, from 9.2% when Obama took office to 4.1% of GDP in 2017. Faster economic growth would shrink the deficit more rapidly. In contrast, further spending cuts will slow the economy and deficit reduction along with it.

So, this is no time for Obama to accept a lower budget path, or to consider cuts in Social Security and Medicare. The small budget deficit reductions in this deal -- less than one-half of 1% of the total debt or $23 billion -- would almost pay for extended unemployment benefits for one year at $25 billion.

Democrats are flinching under continued pressure from Republicans playing out their long game as they ready for another bitter fight when the debt limit is reached next spring. But the President and the Democrats have a winning economic and political strategy: Raise revenues and keep Social Security and Medicare strong. Don't throw October's hard-won victory away; it won't help the elderly, it won't help children, and it won't help the economy.

Follow us on Twitter @CNNOpinion.

Join us on Facebook/CNNOpinion.

The opinions expressed in this commentary are solely those of Rick McGahey and Teresa Ghilarducci.

ADVERTISEMENT
Part of complete coverage on
October 21, 2014 -- Updated 2006 GMT (0406 HKT)
Timothy Stanley says Lewinsky is shamelessly playing the victim in her affair with Bill Clinton, humiliating Hillary Clinton again and aiding her critics
October 21, 2014 -- Updated 0102 GMT (0902 HKT)
Imagine being rescued from modern slavery, only to be charged with a crime, writes John Sutter
October 21, 2014 -- Updated 1600 GMT (0000 HKT)
Tidal flooding used to be a relatively rare occurrence along the East Coast. Not anymore, write Melanie Fitzpatrick and Erika Spanger-Siegfried.
October 21, 2014 -- Updated 1135 GMT (1935 HKT)
Carol Costello says activists, writers, politicians have begun discussing their abortions. But will that new approach make a difference on an old battleground?
October 21, 2014 -- Updated 1312 GMT (2112 HKT)
Sigrid Fry-Revere says the National Organ Transplant Act has caused more Americans to die waiting for an organ than died in both World Wars, Korea, Vietnam, Afghanistan and Iraq
October 21, 2014 -- Updated 1851 GMT (0251 HKT)
Crystal Wright says racist remarks like those made by black Republican actress Stacey Dash do nothing to get blacks to join the GOP
October 21, 2014 -- Updated 2207 GMT (0607 HKT)
Mel Robbins says by telling her story, Monica Lewinsky offers a lesson in confronting humiliating mistakes while keeping her head held high
October 20, 2014 -- Updated 1329 GMT (2129 HKT)
Cornell Belcher says the story of the "tea party wave" in 2010 was bogus; it was an election determined by ebbing Democratic turnout
October 20, 2014 -- Updated 2012 GMT (0412 HKT)
Les Abend says pilots want protocols, preparation and checklists for all contingencies; at the moment, controlling a deadly disease is out of their comfort zone
October 20, 2014 -- Updated 0336 GMT (1136 HKT)
David Weinberger says an online controversy that snowballed from a misogynist attack by gamers into a culture war is a preview of the way news is handled in a world of hashtag-fueled scandal
October 20, 2014 -- Updated 1223 GMT (2023 HKT)
Julian Zelizer says Paul Krugman makes some good points in his defense of President Obama but is premature in calling him one of the most successful presidents.
October 20, 2014 -- Updated 0221 GMT (1021 HKT)
Conservatives can't bash and slash government and then suddenly act surprised if government isn't there when we need it, writes Sally Kohn
October 22, 2014 -- Updated 1205 GMT (2005 HKT)
ISIS is looking to take over a good chunk of the Middle East -- if not the entire Muslim world, write Peter Bergen and Emily Schneider.
October 20, 2014 -- Updated 1300 GMT (2100 HKT)
The world's response to Ebola is its own sort of tragedy, writes John Sutter
October 17, 2014 -- Updated 2033 GMT (0433 HKT)
Hidden away in Russian orphanages are thousands of children with disabilities who aren't orphans, whose harmful treatment has long been hidden from public view, writes Andrea Mazzarino
October 18, 2014 -- Updated 1722 GMT (0122 HKT)
When you hear "trick or treat" this year, think "nudge," writes John Bare
October 18, 2014 -- Updated 0442 GMT (1242 HKT)
The more than 200 kidnapped Nigerian schoolgirls have become pawns in a larger drama, writes Richard Joseph.
October 17, 2014 -- Updated 1345 GMT (2145 HKT)
Peggy Drexler said Amal Alamuddin was accused of buying into the patriarchy when she changed her name to Clooney. But that was her choice.
October 16, 2014 -- Updated 2043 GMT (0443 HKT)
Ford Vox says the CDC's Thomas Frieden is a good man with a stellar resume who has shown he lacks the unique talents and vision needed to confront the Ebola crisis
October 18, 2014 -- Updated 0858 GMT (1658 HKT)
How can such a numerically small force as ISIS take control of vast swathes of Syria and Iraq?
October 17, 2014 -- Updated 1342 GMT (2142 HKT)
How big a threat do foreign fighters in Syria and Iraq pose to the West? It's a question that has been much on the mind of policymakers and commentators.
October 17, 2014 -- Updated 1221 GMT (2021 HKT)
More than a quarter-million American women served honorably in the Iraq and Afghanistan wars. Now they are home, we have an obligation to help them transition back to civilian life.
October 16, 2014 -- Updated 2027 GMT (0427 HKT)
Paul Begala says Rick Scott's deeply weird refusal to begin a debate because rival Charlie Crist had a fan under his podium spells disaster for the Florida governor--delighting Crist
October 16, 2014 -- Updated 0407 GMT (1207 HKT)
The longer we wait to engage on Ebola, the more limited our options will become, says Marco Rubio.
October 15, 2014 -- Updated 1153 GMT (1953 HKT)
Democratic candidates who run from President Obama in red states where he is unpopular are making a big mistake, says Donna Brazile
October 16, 2014 -- Updated 0429 GMT (1229 HKT)
At some 7 billion people, the world can sometimes seem like a crowded place. But if the latest estimates are to be believed, then in less than a century it is going to feel even more so -- about 50% more crowded, says Evan Fraser
October 20, 2014 -- Updated 1653 GMT (0053 HKT)
Paul Callan says the Ebola situation is pointing up the need for better leadership
October 15, 2014 -- Updated 2245 GMT (0645 HKT)
Nurses are the unsung heroes of the Ebola outbreak. Yet, there are troubling signs we're failing them, says John Sutter
October 15, 2014 -- Updated 1700 GMT (0100 HKT)
Dean Obeidallah says it's a mistake to give up a business name you've invested energy in, just because of a new terrorist group
October 15, 2014 -- Updated 2301 GMT (0701 HKT)
Fear of Ebola is contagious, writes Mel Robbins; but it's time to put the disease in perspective
October 14, 2014 -- Updated 1744 GMT (0144 HKT)
Oliver Kershaw says that if Big Tobacco is given monopoly of e-cigarette products, public health will suffer.
October 18, 2014 -- Updated 1335 GMT (2135 HKT)
Stop thinking your job will make you happy.
October 15, 2014 -- Updated 0208 GMT (1008 HKT)
Ruben Navarrette says it's time to deal with another scandal involving the Secret Service — one that leads directly into the White House.
October 14, 2014 -- Updated 1125 GMT (1925 HKT)
Americans who choose to fight for militant groups or support them are young and likely to be active in jihadist social media, says Peter Bergen
October 13, 2014 -- Updated 1303 GMT (2103 HKT)
Stephanie Coontz says 11 years ago only one state allowed same sex marriage. Soon, some 60% of Americans will live where gays can marry. How did attitudes change so quickly?
October 14, 2014 -- Updated 2004 GMT (0404 HKT)
Legalizing assisted suicide seems acceptable when focusing on individuals. But such laws would put many at risk of immense harm, writes Marilyn Golden.
October 13, 2014 -- Updated 1307 GMT (2107 HKT)
Julian Zelizer says the issues are huge, but both parties are wrestling with problems that alienate voters
October 13, 2014 -- Updated 2250 GMT (0650 HKT)
Mel Robbins says the town's school chief was right to cancel the season, but that's just the beginning of what needs to be done
October 11, 2014 -- Updated 1543 GMT (2343 HKT)
He didn't discover that the world was round, David Perry writes. So what did he do?
ADVERTISEMENT