The ‘Back to Work’ Budget

The Back to Work budget is focused on ending the ongoing jobs crisis, and it provides substantial upfront economic stimulus for that purpose. This paper details the budget baseline assumptions, policy changes, and budgetary modeling used in developing and scoring the Back to Work budget, and it analyzes the budget’s cumulative fiscal and economic impacts, notably its near-term impacts on economic recovery and employment.1

We find that the Back to Work budget would have significant, positive impacts in the following areas:

  • Promoting job creation and economic recovery. The Back to Work budget would sharply accelerate economic and employment growth; it would boost gross domestic product (GDP) by 5.7 percent and employment by 6.9 million jobs at its peak level of effectiveness (within one year of implementation), while ensuring that fiscal support lasts long enough to avoid future fiscal cliffs that could throw recovery into reverse.2
  • Targeting a full-employment economy. The budget would rapidly restore the unemployment rate near to pre-recession levels of 5 percent. The unemployment rate would be expected to range between 5.0 and 5.6 percent by 2014, in line with what the Congressional Budget Office (CBO) regards as full employment.
  • Restoring full economic health. U.S. economic output is currently $985 billion (5.9 percent) below potential, and the economy is projected to remain 6 percent below potential in 2013 under current law. The budget would effectively use fiscal stimulus to restore actual GDP to potential GDP—the key barometer for restoring full employment in the economy.
  • Financing job creation and public investments. The budget finances roughly $700 billion in job creation and public investment measures in 2013 alone and $2.1 trillion over 2013–2015.3 This fiscal expansion is consistent with Economic Policy Institute estimates of the fiscal support needed to rapidly restore the economy to full health (Bivens, Fieldhouse, and Shierholz 2013).
  • Strengthening social insurance. The Back to Work budget strengthens the social safety net and proposes no benefit reductions to social insurance programs—in other words, it does not rely on simple cost-shifting to reduce the budgetary strain of health programs. Instead, it uses government purchasing power to lower health care costs (health care costs are the largest threat to long-term fiscal sustainability) and builds upon efficiency savings from the Affordable Care Act. The budget also expands and extends emergency unemployment benefits and increases funding for education, training, employment, and social services as well as income security programs in the discretionary budget.4
  • Making targeted spending cuts. The budget focuses on modern security needs by returning Defense Department spending to 2006 levels. It ends emergency overseas contingency operation spending in FY2015 and beyond, and cuts non-emergency Defense Department spending by $897 billion over 10 years.
  • Raising revenue progressively. The budget restores adequate revenue and pushes back against income inequality by adding higher marginal tax rates for millionaires and billionaires, equalizing the tax treatment of capital income and labor income, restoring a more progressive estate tax, eliminating inefficient corporate tax loopholes, and enacting a financial transactions tax, among other tax policies. 
  • Reducing the deficit in the medium term. The budget increases near-term deficits to boost job creation, but reduces the deficit in FY2015 and beyond relative to CBO’s alternative fiscal scenario (AFS) current policy baseline. The budget would achieve primary budget balance (excluding net interest) and sustainable budget deficits below 2 percent of GDP in FY2016 and beyond. The deficit would gradually fall to 1.2 percent of GDP by FY2023.
  • Targeting a sustainable debt level. After increasing near-term borrowing to restore full employment, the budget gradually reduces the debt ratio to a fully sustainable 68.7 percent of GDP by FY2023. Relative to CBO’s AFS, the budget would reduce public debt by $4.4 trillion (equal to 16.9 percent of GDP). Relative to current law, the budget would reduce public debt by $2.1 trillion (8.3 percent of GDP).5

I. Introduction

The Back to Work budget diverges from prior CPC budget alternatives by directly addressing the nation’s most pressing economic challenges and targeting a rapid return to full employment using expansionary fiscal policy, which is currently the most effective policy lever for boosting employment (Bivens 2011a). The budget was developed from the evidence-based conclusion that the present economic challenge of joblessness results from a large demand shortfall—the result of the housing bubble bursting—and that the depressed state of economic activity is largely responsible for increased budget deficits and the recent rise in public debt. High unemployment in turn is exacerbating the decade-long trend of falling working-age household income and the three-decades-long trend of markedly increased income inequality. Moreover, since mid-2010 contractionary fiscal policy has increasingly slowed economic growth to the point that the U.S. economy is projected to move further away from full employment in 2013.

Accelerating and sustaining economic growth, promoting economic opportunity, and pushing back against the sharp rise in income inequality remain the most pressing economic challenges confronting policymakers. To directly address these issues, the Back to Work budget invests heavily in front-loaded job creation measures aimed not only at putting people back to work, but also at addressing the deficit in physical infrastructure and human capital investments. In stark contrast to the current austerity trajectory for fiscal policy—notably the expiration of the payroll tax cut, the ratcheting down of discretionary spending caps, and the sequestration spending cuts—the Back to Work budget substantially increases near-term budget deficits to finance targeted stimulus, including infrastructure investment, aid to state and local governments, targeted tax credits, and public works programs. These types of investments would yield enormous returns—particularly by reducing long-run economic scarring that is resulting from underutilization of productive resources—and raise national income and living standards.

Beyond improving middle-class living standards, using expansionary fiscal policy to ensure a rapid return to full employment is fiscally responsible. Much of the sticker price of fiscal stimulus will be recouped through higher tax collections and lower spending on automatic stabilizers, such as unemployment insurance. Higher levels of economic activity will also decrease near-term budget deficits and public debt as a share of GDP. Unlike the non-imminent risk that future budget deficits will decrease future living standards, high joblessness and depressed levels of economic activity are decreasing both present and future living standards alike. Ensuring a rapid return to full employment hedges against many downside fiscal risks, notably slower-than-projected economic recovery, larger-than-projected cyclical budget deficits, and decreased long-run potential GDP due to economic scarring. The Back to Work budget would further promote fiscal responsibility and a sustainable public debt trajectory by raising revenues progressively, exploiting health care efficiency savings, and reducing spending by the Department of Defense (DOD).

After increasing near-term borrowing to restore full employment, the budget gradually reduces the debt ratio to a fully sustainable 68.7 percent of GDP by FY2023. Relative to CBO’s AFS current policy baseline, the budget would reduce public debt by $4.4 trillion (equal to 16.9 percent of GDP). Relative to current law, the budget would reduce public debt by $2.1 trillion (8.3 percent of GDP).

The CPC solicited the assistance of the Economic Policy Institute Policy Center (EPIPC) in analyzing and scoring the specific policy proposals in the Back to Work budget and in modeling their cumulative impact on the federal budget over the next decade. The policies in the Back to Work budget reflect the decisions of the CPC leadership and staff, not those of EPIPC.6 Upon CPC’s request, the nonpartisan Citizens for Tax Justice (CTJ) independently scored the major individual income tax reforms proposed in the Back to Work budget. All other policy proposals have been independently analyzed and scored by EPIPC based on a variety of other sources, notably data from CBO, the Joint Committee on Taxation (JCT), the Office of Management and Budget (OMB), and the Tax Policy Center (TPC). 

II. Economic context for a Back to Work budget

The most pressing objective for macroeconomic policy, particularly fiscal policy, is rapidly restoring the economy to full health. More than five years have passed since the onset of the Great Recession in December 2007, but growth in the 3.5 years since the recession’s end has been too sluggish to restore full employment. Unemployment as of February 2013 stands at 7.7 percent, the lowest rate seen since 2008 but still three percentage points higher than the annual rate in 2007, when the recession hit, and the highest rate since 1992. Further, the unemployment rate actually understates how sluggish labor market recovery has been. The share of adults age 25–54 with a job—which fell an unprecedented 5.5 percentage points (from 80.3 percent to 74.8 percent) from its peak to trough due to the Great Recession—is exactly equal to the level (at 75.9 percent) of June 2009, the month the recession officially ended.

As of February 2013, the “jobs gap”—the number of jobs needed to restore the labor market to prerecession health—remained a staggering 8.9 million jobs (Shierholz 2013).7 Despite sustained growth since mid-2009, economic output remains depressed as well. The output gap—the difference between actual economic activity and what the economy could be producing with higher, noninflationary levels of employment and industrial capacity utilization—was $985 billion (5.9 percent of potential output) in the fourth quarter of 2012 (CBO 2013c). The economy has operated at least 5 percent below potential for more than four years; consequently, the United States has cumulatively forfeited $4.5 trillion in national income because of resource underutilization (Bivens, Fieldhouse, and Shierholz 2013).

Depressed levels of output and employment are a direct consequence of the bursting of the housing bubble, which erased trillions of dollars of wealth from household balance sheets. The effects rippled through the economy as consumers pulled back their spending, construction spending cratered, businesses stopped investing and expanding, financial intermediation broke down, and state and local governments cut spending as tax receipts fell. In short, households, businesses, and governments stopped spending enough to keep their workers and resources employed.

The pace of economic growth since the economy emerged from recession in July 2009 has been too sluggish to restore the economy to full health, and fiscal policy has slowed growth rates below what is needed to close this demand shortfall. The American Recovery and Reinvestment Act (ARRA) arrested the economy’s sharp decline and spurred reasonably robust growth during the first year of the recovery, but economic performance has since deteriorated as fiscal policy became increasingly contractionary. Annualized real GDP growth decelerated from 2.7 percent in the last six months of 2009 to 2.4 percent in 2010, 2.0 percent in 2011, and 1.6 percent in 2012 (Bivens, Fieldhouse, and Shierholz 2013).8 Similarly, the pace of employment growth since the labor market turned around in February 2010 has been too slow to restore full employment. While the national unemployment rate has fallen from 10 percent in October 2010 to 7.7 percent in February 2013, much of this decline reflects workers dropping out of the labor force due to the unavailability of jobs. If these workers were still in the labor force and unemployed, the unemployment rate would be closer to 10 percent. Additionally, if the average monthly job gains seen in 2012 persisted, it would take until 2019 to close the jobs gap (Bivens, Fieldhouse, and Shierholz 2013).

While policymakers should be pursuing renewed fiscal expansion to accelerate the inadequate pace of economic and employment growth, Congress has instead enacted austerity measures—largely ignoring the economic and budgetary damage wrought by austerity budgets in the United Kingdom and other developed countries. This turn toward fiscal contraction has been largely driven by the enactment of the Budget Control Act (BCA) of 2011, which cut and capped discretionary spending and established the automatic “sequestration” spending cuts that took effect March 1, 2013. Discretionary spending cuts preceding the BCA, the recent expiration of the payroll tax cut, and decreased emergency unemployment benefits have also intensified fiscal drags. Regrettably, the budget deal passed by the lame-duck Congress in January 2013 (the American Taxpayers Relief Act, or ATRA) failed to address the fundamental challenge posed by the “fiscal cliff” of legislated spending cuts and tax increases and instead accelerated the pace of deficit reduction relative to current policy (Fieldhouse 2013).

By prematurely pulling away from fiscal support, policymakers are condemning the economy of the future to depressed output, anemic growth, high unemployment rates, and large cyclical budget deficits (Bivens, Fieldhouse, and Shierholz 2013). Instead of prioritizing recovery, the Washington budget debate remains entirely focused on the one policy intrinsically at odds with spurring near-term economic growth—reducing budget deficits, and deficits will remain high as long as the economy is depressed.

Using fiscal policy to boost aggregate demand remains the key to restoring full employment, and will actually prove largely self-financing in dollar terms and improve key metrics of fiscal health (notably the public debt-to-GDP ratio) in the near term, so long as interest rates remain historically low. Conversely, budget austerity—particularly cutting spending—is so economically damaging that it actually becomes fiscally counterproductive in current conditions. For example, sequestration spending cuts are projected to increase the debt ratio by the end of FY2013. The risks of austerity were also highlighted by concerns over the fiscal cliff in late 2012; if no congressional action were taken, budget deficits would have closed too quickly (meaning debt would not be allowed to rise fast enough) and the economy would have been pushed into an austerity-induced recession (CBO 2012a). Having avoided the crippling austerity that has driven much of Europe back into recession, the United States is now embarking on the austerity path despite a wide consensus among economic experts that austerity wreaks havoc on depressed economies (Blanchard and Leigh 2013). Too many policymakers have turned a blind eye to the mounting historical and international evidence which shows that premature deficit reduction would likely worsen the near-to-medium-term fiscal outlook.

Ensuring a rapid return to full employment requires larger near-term budget deficits to close the shortfall in aggregate demand through public investment, safety net spending, and federal support to state and local governments. The Economic Policy Institute estimates that between $600 billion and $700 billion of deficit-financed, targeted fiscal support would be needed in 2013 alone to close the output gap, and fiscal support totaling between $1.5 trillion to $2.2 trillion would be needed over 2013–2015 (Bivens, Fieldhouse, and Shierholz 2013).

U.S. macroeconomic policy is currently being driven by a misguided obsession with deficits that fails to address much of the cause of the recent rise in budget deficits: economic weakness. The Back to Work budget takes a strong stand against the harmfully misguided deficit-reduction fixation by pursuing policies that aim to close the output gap and return the economy to full employment, all while ensuring sustainable projected deficit and debt levels.

The following sections describe first the spending proposals and then the revenue policies in the Back to Work budget (see Table 1). The budget is modeled and all policies are scored relative to CBO’s February 2013 current law baseline (CBO 2013a).9 Individual policies and net budgetary impacts, including deficits (see Figure A) and the debt ratio (see Figure B), are compared with CBO’s current law and AFS current policy baselines. (Tables and figures can be found at the end of this report.)


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