Uncertainty and Austerity: What the Debt Deal Means for the States

On Tuesday, President Obama signed the Budget Control Act of 2011 to increase the debt ceiling and avoid default, marking the end of a manufactured crisis that saw the right wing engage in hostage-taking antics that threatened to push the nation toward economic catastrophe. The deal makes it even more apparent that there exists a pernicious dichotomy between Washington's priorities and the actual economic experience of average American families. While the wealth gap continues to widen, unemployment remains abysmally high, and states reel from historic revenue shortfalls, federal discourse over the past month instead centered on the depth and extent of programmatic cuts. And while the exact details are uncertain, it is clear that states stand to lose substantial federal funding for vital programs — such as education, public safety, and elderly care — in the coming years.

Political dysfunction only exacerbates the faltering recovery. Last week, the Commerce Department's Bureau of Economic Analysis released data indicating severely anemic economic growth. GDP increased 1.3 percent in the second quarter of this year, and only 0.4 percent in the first. Additionally, consumer spending fell, declining for the first time in almost two years. Unemployment figures released in June marked the eighth consecutive month of job loss in the state and local government sector, which is one of the primary contributors to the nation's sputtering economic rebound. Over 14 million Americans were out of work as of June, while labor force participation "remained at its lowest level since April 1984." As several commentators have emphasized, the true immediate crisis is not the debt, but persistent joblessness.

Incredibly, the debt-ceiling deal does not address any of these realities. In fact, the bill contains no initiatives to spur demand, promote growth, or further recovery efforts, such as an extension of unemployment insurance, payroll tax cuts, expanded infrastructure investment, or much-needed aid to the states. What's more, the deal does not generate any revenue, which most analysts agree is wholly necessary to confront long-term deficit reduction. Conservatives maintained a hard line throughout negotiations that they would not support an increase in the debt-ceiling if any revenue was included in the package. The Economist found that, "the vast majority of Republicans, driven on by the wilder-eyed members of their party and the cacophony of conservative media, are clinging to the position that not a single cent of deficit reduction must come from a higher tax take,” calling their position “economically illiterate and disgracefully cynical."

Instead, the deal hinges upon almost $1 trillion spending cap over the next decade, which is slated to decrease non-security domestic spending to under 2 percent of GDP in 2021, the lowest level since the Eisenhower Administration. These reductions will come from defense and discretionary spending. In the short-term, Social Security, Medicaid, and other entitlement programs are protected, but are likely to be impacted years down the line. Federal lawmakers also spared Pell Grants, but at the expense of a special loan program for graduate students. The bill also designates a bipartisan Congressional "supercommittee" to identify up to $1.5 trillion in deficit reduction by late fall. If they agree on a package, the House and Senate would then vote on the proposals. However, if they do not reach an agreement, $1.2 trillion in additional cuts to defense and discretionary spending will be automatically triggered to begin in 2013. Nevertheless, there is a great deal of uncertainty in the specific areas of reductions, the actual process of programmatic reductions, and the feasibility of the committee, which led the New York Times to assess the Budget Control Act to be "as contrived as the artificial crisis that spawned it,” describing the bill as “a tired opera production, full of clumsy staging and failed gimmicks left over from previous decades."

Nick Johnson of the Center on Budget and Policy Priorities notes that the deal “inevitably will lead to large federal cuts in programs for state and local governments,” and that these cuts will begin “in the middle of the worst year for state budgets." On average, a full one-third of all state dollars flow from the federal government. This funding is directed to a wide range of areas, including Medicaid, education, food stamps, school readiness programs, and worker training initiatives. States, already devastated by the the largest budget shortfalls on record and the end of federal recovery efforts, have already resorted to making some of the deepest cuts to education and health care in years — so much so, that many states' current spending falls below pre-recession levels. Even as state and local governments have slashed workforces dramatically — almost 10,000 to 20,000 positions per month since August 2008 — the debt deal will likely lead to future job loss as well. Contraction in federal spending will only worsen weak state fiscal circumstances, prolong economic pain, slow recovery even further, potentially cause a drastic cost-shift to the states, and reduce support for important public services.

It seems that federal lawmakers are all too willing to compromise middle class economic security and support for vulnerable populations in the name of "bipartisan compromise." It is also clear that conservative intransigence has corroded the political process. The right placed the country's economic standing at risk in an effort to appease corporations and the affluent as well to weaken the administration politically moving into the 2012 elections. The public has noticed that the economy, working families, and states received the short-end of this deal and are rightly disgusted by this display of extreme partisanship. Policy should not be subject to the whims of ideological zealots, political recklessness, and warped discourse. Economic security, fiscal stability, and job creation should not be partisan issues — the country's recovery depends on rebuilding prosperity though strengthening demand, supporting small businesses and working families, augmenting investment in infrastructure, ensuring all taxpayers are contributing their fair share, and promoting robust growth.

Full Resources from this Article

Uncertainty and Austerity: What the Debt Deal Means for the States

Center on Budget and Policy Priorities – Deal Avoids Default, but Sets Nation on Disturbing Policy Course
Center on Budget and Policy Priorities, Off the Charts Blog – What the debt limit deal means for states
DEMOS - Debt Ceiling Deal Will Mean 1.8 Million Fewer Jobs in 2012
Economic Policy Institute – What's missing from the debt ceiling debate?
Progressive States Network – PSN 2011 Tax and Budget Roundup
ProPublica – Our Sputtering Economy, by the Numbers – For states, debt deal is short on details
US Conference of Mayors – Pass Debt Ceiling Legislation, Then Focus on Investments for Job Creation
Washington Post – With debt deal, states brace for cuts in federal funding
White House – Fact Sheet: Bipartisan Debt Deal: A Win for the Economy and Budget Discipline

This article is part of PSN's email newsletter, The Stateside Dispatch.
View other items from this edition