Austerity and Housing Policy in 2011

by Richard Michael Price on Nov 28, 2011

A favorite tactic for zealots on the right and the left is to try to disguise their ideology and values as economic necessity.[ii]

Financial pressures seem to be leading the U.S. to make a fundamental change in the way the government does business.  The Great Recession, beginning late 2007 and presumably ending in 2009 , created a set of massive government initiatives.  We are familiar with the TARP (or the bank rescue) and ARRA (or stimulus) and various other small business, Medicaid, teacher and local government rescue efforts.  These efforts, coupled with the Obama Administration’s expansion of Medicare, created a shift in budget priorities.  Intentional or not, new programs create new constituencies.  Once spending starts, businesses and local governments invest precious resources to wade through typically complex federal programs.  With resources invested, pressure builds to maintain those programs.  This continuing pressure looks to some like a potential ongoing demand for massive federal spending.

The fiscal year 2010 federal budget was in excess of three trillion dollars with a deficit of about $1.3 trillion.[iii]  The fiscal year 2011 budget was even larger, though the deficit projections shrunk slightly.[iv]  These deficits are of historic significance both as a percentage of gross domestic products (“GDP”) as well as a total dollar number.  Indeed, these budget deficits as a percentage of GDP rival deficits the U.S. ran during World War II.[v]  So we see an economic downturn, the likes of which we haven’t seen since the 1930s, and government spending response, the likes of which we haven’t seen since the early 1940s.  In addition to the sheer magnitude of this spending, and with no hint of a financial problem, concerns begin to rise about the United States’ continued ability to borrow.

People who wonder what America’s budget problem is ultimately about should look to Europe.  In the streets of Dublin, Athens, and London, angry citizens are protesting government plans to cut programs and raise taxes.  The social contract is being broken.  People are furious; they feel betrayed.”[vi]

These same issues have been bedeviling other industrialized nations around the world and recently led to a weakening confidence in the euro.  The United States has watched as one industrialized nation after another has enacted austerity budgets.[vii]  Unfortunately, austerity budgets abroad have created massive cuts in spending but also predictable massive increases in unemployment and further recession.[viii]

The United States is succumbing to a similar desire for austerity budgets.  Spending less or taxing more might be simple enough except that at the very same time our congressional leaders and the Obama Administration are deciding how to spend more and tax less.  The three leading self-described bipartisan deficit reduction plans issued over the past two years all seek to reduce the deficit, yet make that goal more difficult by cutting certain taxes.[ix]  It is notable that most of these bipartisan plans would decrease the deficit by roughly four trillion dollars.  To compound the problem, each of the plans seems to ignore the debate about extending the so-called Bush tax cuts, which add nearly $4 trillion to the debt.[x]

The Presidentially sanctioned bipartisan group known as the Bowles-Simpson proposal seeks $2.2 trillion in spending cuts and another $960 billion in tax increases creating austerity budgets starting 2012 and reducing deficits by $3.8 trillion.[xi]  Again that would not quite offset the deficit increases being contemplated through the extension of the Bush tax cuts at the end of 2010.  The next bipartisan group, the Bipartisan Policy Center’s Debt Reduction Task Force (“BPC”), keeps spending cuts at $2.7 trillion and tax increases at $2.3 trillion, creating a total deficit reduction of $5.8 trillion. xi  Another group is Galston-MacGuineas.  William Galston is a former domestic policy advisor to Bill Clinton and Maya MacGuineas is a former campaign advisor to Senator John McCain.  This group seeks spending cuts of $2.9 trillion and tax increases of $2.7 trillion for a deficit reduction of $6.7 trillion, which is actually getting into territory that would provide material deficit reduction. xi

What is troubling about each of these proposals is they seek to change the winners and losers in the federal budgeting process for no objective reason.  For example, Bowles-Simpson seeks to wipe out all tax expenditures including the homeowner’s interest reduction and all tax credits.  The marginal tax rates would be lowered, of course, but Americans working in and around real estate and other industries would be subject to a more hostile business environment and would have less income to tax.  BPC wipes out most tax expenditures, fundamentally shifting business without any real case made for a net benefit.  The Galston-MacGuineas proposal seeks to cut tax expenditures by 10% and caps their growth.  It caps the mortgage interest deduction at $500,000 and also adds a broad base tax on carbon emissions.  This is the most even-handed of the plans but perhaps the most politically ignored.  In some respects it is even-handed and doesn’t play either to the typical enunciations of tax cuts from the right or social expansions from the left.  Into this miasma wanders individual suggestions such as Martin Feldstein’s motion of capping the effect of tax expenditures, not tax expenditures themselves, to allow our current and effective system of tax expenditures to function, but limiting the overall economic effect or at least spreading out over a number of years, which would in turn help with deficit reductions.[xii]

When we borrow 40 cents of every dollar we spend, whether it’s for the Pentagon or food stamps, that’s not sustainable.”[xiii]

What is most important for affordable housing providers is to recognize there is an ongoing competition for resources that will remain as these plans are developed, and after.  Without the effective education of our congressional representatives and a broad based and coordinated effort to voice support for affordable housing, we could find affordable housing resources severely limited starting in 2012 and beyond.  Indeed, each of the above-noted plans calls for some substantial cut in domestic spending.  Frustratingly, domestic discretionary spending (such as affordable housing) has historically lagged behind entitlement programs (social security and health care) and military spending.[xiv]  Yet further dramatic cuts are demanded in each austerity proposal.

 


[i] This Article is Revised and reprinted from CARH News, dated November-December 2010.

[ii]  “We Need a Grand Compromise on the Deficit, Not Hyperbole,” Washington Post, Friday, Dec. 3, 2010, p. A19.

 

[v] www.money.cnn.com (December 20, 2009 post).

 

[vi] “What the Bowles-Simpson Plan Left Out,” Newsweek.com, December 6, 2010.

 

[vii] “German call for Austerity has Europe Grumbling,” www.nytimes.com (March 17, 2010); “Europe Austerity Boosts Risk of US Rift,” www.msnbc.com (June 22, 2010).

 

[viii] “Budget will Cost 1.3m Jobs,”  www.guardian.co.uk  (June 29, 2010).

 

[ix] Bipartisan Policy Center Task Force Unveils Bold, Comprehensive Plan to Solve Debt Crisis, Create Jobs,” Bipartisan Policy Center, November 17, 2010.

 

[x] “Fearing Soaring Deficit, Money Analysts Favor Letting Bush Tax Cuts Expire,” The Washington Post, September 21, 2010.

 

[xi] “Common Threads in Bipartisan Plan to Reduce the Deficit,” The Washington Post, November 24, 2010.

 

[xii] “A Route to Cutting the Deficit,”  The Washington Post, November 29, 2010.

 

[xiii] “Deficit Plan Fails to Win Panel Support,”  The Wall Street Journal, December 3, 2010.

 

[xiv] Center on Budget and Policy Properties, 2/20/2008 (during 2001-2008, domestic discretionary spending shrunk from 3.31% to 3.15% of GDP).

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