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Debt Law Vaults America Forward Into the 1950s

By Alain Sherter

Updated on: August 2, 2011 / 5:31 PM EDT / MoneyWatch

Jared Bernstein, who until recently served as Vice President Joseph Biden's top economic adviser, puts his finger on the screwy logic underlying the deficit-reduction bill signed into law today:

[President Obama] also bragged that "these discretionary caps will put us on track to reduce non-defense discretionary spending to its lowest level [as a share of GDP] since Dwight Eisenhower was President."

Why is that a good thing? Why are 1950s levels (relative to GDP) of investment, infrastructure, and research in medicine and innovation so damn optimal?

As Bernstein notes, non-defense discretionary public spending -- meaning the sort of funding that Congress sets every year -- goes toward things like education, jobs training, R&D, transportation, health research, and housing and food assistance. In other words, areas that support economic growth and that are vital to the country's future prosperity.

Contrary to popular belief, such spending is not out of control. It's not even growing. Accounting for inflation and population growth, funding for these programs is at the same level today that it was in 2001.

Mission impossible
Under the new law, discretionary spending will shrink by $917 billion, with $350 billion of that amount coming from defense. Although cuts are "back-loaded" to increase toward the end of that 10-year period, they're still enough in the short term to hurt, and perhaps even tip the fragile economy back into recession.

The cuts also look fanciful at best -- at worst, they're a mirage. Economist James Galbraith notes that they will take discretionary spending down to levels before government had a major hand in environment protection, medical research, occupational safety and many other areas. He writes:

This is a false promise: Those cuts cannot and will not be found. To promise them is to play to the gallery of the ignorant. To pretend that to make them would be good policy is to repudiate the entire past half-century. To make them would bring on a disaster, in many small and large ways, as the physical structures and legal and institutional protections built up over decades crumbled and fell apart.

How did discretionary spending end up in the legislative cross-hairs? Because without raising taxes, as Republicans uniformly oppose, and slashing mandatory entitlement programs, as Democrats (say they) oppose, there's no other way close the deficit. It makes sense to reduce defense and security spending, of course. Beyond the usual exorbitant waste, the Pentagon's budget has risen 38 percent since 2001 -- excluding the cost of fighting two wars.

Budgeting is about balancing competing priorities. And with more and more Americans joining the ranks of the long-term unemployed, education and job training are essential. If you don't believe me, just take it from, Austan Goolsbee, who heads the President's Council of Economic Advisers:

The "confidence fairy"
To be fair, the debt deal does protect funding for low-income college students. Still, it's hard to have much enthusiasm for a plan that claims to sow the seeds for growth while depriving them of water.

Astonishingly, many lawmakers are perfectly aware that ratcheting back spending will hurt the economy. Consider what Senate Budget Committee chief Kent Conrad, D-N.D., told Slate's David Weigel last weekend about the impact of the deficit plan:

There was one nagging question I wanted to ask: All the discretionary spending cuts in the plan -- did they threaten to slow down growth, to drive up unemployment?
"Sure they do," [Conrad] answered. "Now, what we don't know is: What will the offset be of improved certainty and confidence? And we'll just have to see."

Here's something I can say with certainty and confidence: As the economy sags, we'll need to come up with better answers for how to revive it than "we don't know" and "we'll just have to wait and see."

Thumbnail courtesy of the Dwight D. Eisenhower Library via Wikimedia Commons
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