US budget deal: Congress' epiphany that austerity right now is foolish

http://www.theguardian.com/commentisfree/2013/dec/13/congress-budget-deal-austerity-foolish

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Austerity or growth? For the last several years, governments in the US and UK have chosen a misguided course of austerity, leading to disappointing economic growth in both countries. Fortunately, it appears that the US Congress is starting to recognize that austerity has gone too far. The budget compromise struck earlier this week by Democratic Senator Patty Murray and Republican Congressman Paul Ryan is a small but significant step back from the austerity that has held back the American economy.

To be sure, the agreement is far from perfect. Many of the policy choices in the package could have been much better, especially if conservatives were willing to drop their stubborn refusal to close even a single tax loophole. The budget agreement also leaves Congress with critical unfinished business: over one million jobless workers will lose their unemployment benefits at the end of this year unless Congress acts. But even with those substantial flaws, passing the Murray-Ryan agreement is certainly a better choice than continuing disastrous austerity for another year.

According to a Macroeconomic Advisers report, austerity-driven spending cuts have eliminated 1.2m jobs in the United States since 2010. The worst of these cuts are automatic across-the-board cuts known as "sequestration," which kicked in earlier this year. These cuts have already thrown 57,000 children out of Head Start preschool programs, undermined federal law enforcement, and scuttled groundbreaking scientific research.

Sequestration caused terrible damage this year, but it would be far worse next year. The cuts get bigger, and federal agencies are running out of short-term stopgaps to mitigate the harm. The Congressional Budget Office estimates that another year of sequestration will eliminate 800,000 jobs.

The Murray-Ryan agreement delivers $45bn of relief from austerity in 2014, and $18bn of relief in 2015. That's not nearly enough to completely reverse the austerity policies of the last several years – or even undo sequestration completely – but it provides an opportunity to reverse some of the worst cuts to education, research, infrastructure, public safety, and the social safety net. Restoring investment in these sectors creates jobs now – when they are so desperately needed – and strengthens the middle-class to build a foundation for long-term economic prosperity.

Changing course away from austerity is a big victory, but it did not come without cost, in large part because conservatives refused to consider any tax changes. The Murray-Ryan package does include some new revenue from higher user fees, but those higher fees will mean more middle-class sacrifice than would have been necessary if tax loopholes were closed instead.

For example, the Murray-Ryan package includes an increase in aviation security fees, which will make flying more expensive for middle-class Americans. This fee increase could have been smaller, if conservatives were willing to end a tax break for private jet owners. Businesses buying private jets deduct their purchase costs over a five year period, even though commercial jets must be deducted over a longer seven year period. That special treatment for private jets will cost taxpayers $3bn over the next ten years – enough to reduce the increase in aviation security fees by 25%.

The Murray-Ryan deal also cuts retirement benefits for troops and civil servants. Instead, the package could have closed the "carried interest" loophole, which wealthy investment fund managers exploit to pay lower taxes than other workers. A carried interest pays managers based on the performance of their fund's investments. But even though fund managers do not invest their own money to create the carried interest, the proceeds are still taxed at lower rates that are otherwise reserved for investment income. Unfortunately, conservatives chose to protect extremely wealthy financial professionals at the expense of middle-class troops and civil servants.

The single largest flaw in the Murray-Ryan package is the neglect of unemployment benefits. Emergency benefits for the long-term unemployed will expire at the end of this year. An estimated 1.3 million unemployed workers will lose their benefits right after Christmas, with 3.6 million more losing their benefits over the next year.

President Obama recently declared that the "relentlessly growing deficit of opportunity is a bigger threat to our future than our rapidly shrinking fiscal deficit." Yet Congress is choosing to further expand the deficit of opportunity by turning a blind eye to those Americans who are struggling most to find work. Fixing this mistake should be a top priority.

But for all of these flaws, the Murray-Ryan agreement is still a positive step towards better fiscal policy. After several years when austerity only got worse, this deal finally takes some small steps to invest in the economy and strengthen the social safety net. At long last, Congress is starting to reverse course on austerity and choose economic growth.

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