Sometimes there is nothing that can do more harm than a really bad idea.
An unwarranted fear of budget deficits threatens to stop economic recovery in its tracks and harm those who are suffering the worst effects of the great recession.
In 1961 President Kennedy called for a tax cut that would increase the deficit in the short term in order to spur economic growth. Though he was eventually successful, it was not easy to convince a country that did not yet grasp Keynesian economics that deficits in short run would lift up the economy and lead to surpluses in the future.
By 1971, however, Richard Nixon announced “we are all Keynesians now.”
In 2010, it appears that we have forgotten the lessons, and the successes, of Keynesian economics and are thus poised to do severe damage to our economy, to the Pennsylvania State Budget, and to millions of our fellow citizens.
Two weeks ago, the House of Representatives passed HR 4213, which extends unemployment benefits another 13 to 20 months, depending on the level of unemployment in a state.
But, because some members of Congress were afraid to cast a vote increasing the deficit by a small amount, two important provisions were removed from the bill.
The first is a $24 billion, six months extension of FMAP, the enhanced Medicaid match that was included in the stimulus bill, the American Recovery and Reinvestment Act (ARRA). This provision, which temporarily increases the Federal contribution to Medicaid, is critical to many states continue to suffer from recession-induced declines in tax revenues. This is an especially serious problem in our state. Every Democratic or Republican proposal for the next Pennsylvania budget counts on receiving the $848 million in FMAP funds that were removed from HR 4213 last week. Without those funds, our state will face a huge budget deficit and the prospect of further deep cuts in state spending for medical assistance and other purposes or a stiff tax increase.
The second is a $7 billion extension of the COBRA subsidies that pay 65% of the health insurance costs for the newly unemployed. With many people still losing their jobs each week, subsidized COBRA benefits are necessary to protect the health of thousands of Pennsylvanians looking for work.
FMAP and COBRA subsides are not just important means of protecting the health of our fellow citizens. They are also the most effective way to keep the economy moving forward. Economic studies have long shown that federal money spent on health care and on helping states avoid lay-offs and services cuts are among the most effective means to stimulate the economy.
HR 4213 will also address the long term deficit, provided that two tax provisions in the House bill are maintained by the Senate. One closes a foreign tax credit loophole that not only costs the treasury billions but encourages businesses to move jobs abroad. The second provision closes a loophole that allows investment fund managers to pay taxes on what is essential wage income at the lower capital gains rate.
So, a restored HR 4213 would be a perfect Keynesian measure. It will include provisions that temporarily increase spending and deficit, when we need it to prevent a double dip recession, as well as provisions to close tax loophole that do not expire, thus reducing the deficit in future years when the economy has recovered.
That the kind of bill would embody good ideas and smart economic thinking, not a frantic concern about the immediate deficit that is driven more by political partisanship than by serious economic analysis.
The Senate is now considering legislation that includes the FMAP. And Senator Bob Casey, with the support of Senator Arlen Specter and about twenty other Democrats, has introduced an amendment to restore COBRA funding as well. Let’s hope they succeed.