Austerity = slower growth + huge job losses
Ryan proposes another path to fewer jobs and slower growth
On net, we estimate that the Ryan budget would decrease gross domestic product (GDP) by 1.7 percent and decrease nonfarm payroll employment by 2.0 million jobs in calendar year 2014 relative to current policy. We estimate that the Ryan budget would increase the unemployment rate by between 0.6 percentage points and 0.8 percentage points. The Ryan budget would push the output gap—the difference between actual output and non-inflationary potential output, which registered $985 billion (5.9 percent of potential) as of the fourth quarter of 2012—from 4.4 percent under the AFS baseline back to 5.9 percent. By proposing a budget that would leave the output gap unchanged from 5.9 percent of potential GDP by the end of 2014, Ryan has essentially proposed that for at least two years the U.S. economy make zero relative progress in emerging from the current adverse economic equilibrium of depressed economic output, slow growth, high unemployment, and large cyclical budget deficits.
While the full brunt of Ryan’s austerity does not take effect until 2014, it’s worth noting that his budget would also lower economic growth by 0.6 percentage points and employment would fall by 750,000 jobs in calendar year 2013—this is mostly the effect of sequestration taking effect for the remainder of the year (and consistent with CBO’s estimate that sequestration will reduce employment by 750,000 jobs this year). Job losses would then rise to a total of 2.0 million in 2014 as new austerity measures kick in and the economic drag from sequestration increases.
CBO’s economic projections show real GDP growth accelerating to 4.0 percent in 2014, the beginning of the economy’s rapid return to full employment that has routinely been projected four to five years from CBO’s forecast issuances. The Ryan budget would guarantee that growth rates in this range do not materialize in 2014 or 2015, and likely longer. As a result, the U.S. economy would remain depressed for longer than forecast, cyclical budget deficits would be larger than forecast, and additional economic scarring from productive resources atrophying would further decrease long-run potential output. Higher unemployment would also compound the decade-long trend of falling real income for median working age households and the three-decade long trend of widening income inequality. In short, the Ryan budget would reduce middle class living standards, both present and future.
This approach to fiscal policy ignores a plethora of historical and international evidence and a wide consensus among economists that austerity measures—particularly spending cuts—wreak havoc on depressed economies, to the point of being fiscally counterproductive: primary spending cuts are simply replaced with bigger cyclical budget deficits as depressed economic activity reduces tax receipts and increases automatic spending (e.g., unemployment benefits), and a poorer nation will have a harder time sustaining its debt.