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
August 18, 2014 -- Updated 1242 GMT (2042 HKT)
The former U.K. prime minister and current U.N. envoy says there are 500 days left to fulfill the Millennium Goals' promise to children.
August 18, 2014 -- Updated 1310 GMT (2110 HKT)
Julian Zelizer says the left mistrusts Clinton but there are ways she can win support from liberals in 2016
August 19, 2014 -- Updated 1149 GMT (1949 HKT)
Peter Bergen says the terror group is a huge threat in Iraq but only a potential one in the U.S.
August 16, 2014 -- Updated 1734 GMT (0134 HKT)
Mark O'Mara says the way cops, media, politicians and protesters have behaved since Michael Brown's shooting shows not all the right people have learned the right lessons
August 17, 2014 -- Updated 1523 GMT (2323 HKT)
Retired Lt. Gen. Mark Hertling says the American military advisers in Iraq are sizing up what needs to be done and recommending accordingly
August 15, 2014 -- Updated 1941 GMT (0341 HKT)
Marc Lamont Hill says the President's comments on the Michael Brown shooting ignored its racial implications
August 15, 2014 -- Updated 2146 GMT (0546 HKT)
Joe Stork says the catastrophe in northern Iraq continues, even though many religious minorities have fled to safety: ISIS forces -- intent on purging them -- still control the area where they lived
August 14, 2014 -- Updated 2226 GMT (0626 HKT)
Tim Lynch says Pentagon's policy of doling out military weapons to police forces is misguided and dangerous.
August 15, 2014 -- Updated 1315 GMT (2115 HKT)
S.E. Cupp says millennials want big ideas and rapid change; she talks to one of their number who serves in Congress
August 14, 2014 -- Updated 2357 GMT (0757 HKT)
Dorothy Brown says the power structure is dominated by whites in a town that is 68% black. Elected officials who sat by silently as chaos erupted after Michael Brown shooting should be voted out of office
August 14, 2014 -- Updated 1149 GMT (1949 HKT)
Bill Schmitz says the media and other adults should never explain suicide as a means of escaping pain. Robin Williams' tragic death offers a chance to educate about prevention
August 15, 2014 -- Updated 1505 GMT (2305 HKT)
Nafees Syed says President Obama should renew the quest to eliminate bias in the criminal justice system
August 14, 2014 -- Updated 2024 GMT (0424 HKT)
Eric Liu says what's unfolded in the Missouri town is a shocking violation of American constitutional rights and should be a wake-up call to all
August 13, 2014 -- Updated 1922 GMT (0322 HKT)
Neal Gabler says Lauren Bacall, a talent in her own right, will be defined by her marriage with the great actor Humphrey Bogart
August 15, 2014 -- Updated 1056 GMT (1856 HKT)
Bob Butler says the arrest of two journalists covering the Ferguson story is alarming
August 13, 2014 -- Updated 2035 GMT (0435 HKT)
Mark O'Mara says we all need to work together to make sure the tension between police and African-Americans doesn't result in more tragedies
August 18, 2014 -- Updated 2006 GMT (0406 HKT)
Pepper Schwartz asks why young women are so entranced with Kardashian, who's putting together a 352-page book of selfies
August 13, 2014 -- Updated 2308 GMT (0708 HKT)
Michael Friedman says depression does not discriminate, cannot be bargained with and shows no mercy.
August 12, 2014 -- Updated 1251 GMT (2051 HKT)
Mary Allen says because of new research and her own therapy, she no longer carries around the fear of her mother, which had turned into a generalized fear of everything
August 12, 2014 -- Updated 1959 GMT (0359 HKT)
Gilbert Gottfried says the comedian was most at home on the comedy club stage, where he was generous to his fellow stand-up performers
August 12, 2014 -- Updated 2054 GMT (0454 HKT)
Iris Baez, whose son was killed by an illegal police chokehold, says there must be zero tolerance for police who fatally shoot or otherwise kill unarmed people such as Michael Brown
August 12, 2014 -- Updated 1246 GMT (2046 HKT)
Maria Cardona says as he seeks a path to the presidency, the Kentucky Senator is running from his past stated positions. But voters are not stupid--and they know how to use the internet
August 13, 2014 -- Updated 0219 GMT (1019 HKT)
Gene Seymour says the shock at the actor and comedian's death comes from its utter implausibility. For many of us over the last 40 years or so, Robin Williams was an irresistible force of nature that nothing could stop.
August 12, 2014 -- Updated 1951 GMT (0351 HKT)
Soledad O'Brien says the story of two veterans told in a documentary airing on CNN shows the challenges resulting from post-traumatic stress
August 12, 2014 -- Updated 1525 GMT (2325 HKT)
LZ Granderson says we must not surrender to apathy about the injustice faced by African Americans
ADVERTISEMENT