The budget deal isn’t good for the economy. It’s less bad for the economy.

December 11, 2013
Diminished expectations watch: This budget deal is good for the economy by being less horrible than the alternative. (Photo by J. Scott Applewhite)/AP)
Diminished expectations watch: This budget deal is good for the economy by being less horrible than the alternative. (Photo of Rep. Paul Ryan and Sen. Patty Murray by J. Scott Applewhite/AP)

The budget deal that Sen. Patty Murray (D) and Rep. Paul Ryan (R) announced Tuesday night could be good news for the U.S. economy in 2014. Not for what it contains. Rather, for what it doesn’t contain — and for the fact that it exists at all.

The upshot of the deal is this: The spending cuts that were scheduled to occur under sequestration will be softened and will be easier to manage by government agencies than they would have been, to the tune of $45 billion in 2014. The deal will reduce the deficit not by increasing taxes (anathema to Republicans) but by increasing various government fees — for mineral leasing, oil and gas royalties, air safety, and more. For a full rundown of what’s in it, check here or here.

When you’re trying to suss out what this (or any) deal means for near-term economic growth, it’s important to distinguish between levels versus change. The level of government discretionary will still be lower in 2014 than it was in 2013. (As recently as 2012, that number was $1.285 trillion; under the Murray-Ryan deal, it will be $1.012 trillion. Absent the deal, it would be $967 billion.)

What matters is that under the deal, fiscal policy still be a drag. It just will be less of a drag than it would be otherwise. Economists at Barclays, for example, now think that tighter federal spending will reduce the overall growth rate in 2014 by 0.25 percent, not the 0.5 percent they estimated previously.

In other words, at a time of high unemployment, falling deficits and low interest rates, budget-cutting is still making the economy worse than it otherwise would be. But with this deal, Washington policy will be less counterproductive than it otherwise would be.

If other sectors of the economy continue to show momentum in 2014 -- if the housing recovery persists and accelerates, if consumers take advantage of their improved household balance sheets to buy more stuff, if businesses see all this as reason to invest more — then the federal government won’t be doing as much to offset that progress.

There are a couple of other ways the deal will affect the broader economy, one good, two bad.

By locking in place a budget plan through the 2015 fiscal year — through Sept. 30, 2015 --  the deal will remove the risk of confidence-jarring government shutdowns in the interim. The political calculus behind this is obvious enough. Republicans didn’t care for the public opinion hit they took during the October shutdown, and would prefer to run in 2014 elections by emphasizing the failures of Obamacare, so this takes away the prospect of a rogue group of Republicans steering the party back toward a strategy that worked poorly for them last time (and the time before that, in the 2000s).

“The deal reduces the potential for fiscal brinkmanship surrounding the budget that has clouded the US outlook in recent years and led to the short-term federal government shutdown this past October,” wrote Michael Gapen of Barclays.

The less good news is that the new deal does not raise the debt ceiling, offering the prospect of more showdowns over raising the nation's borrowing limit, which is no help for financial markets or business confidence. But after the ugly August 2011 negotiation, the Obama administration has taken a hard line against negotiating policy concessions over debt ceiling threats and shows no sign of yielding on this point. And Republican leadership, with their backs to the wall, have passed debt ceiling increases with significant Democratic votes rather than risk a debt default.

Finally, as my colleague Ezra Klein notes, the deal does not extend long-term unemployment insurance benefits. This is terrible news for the 4.1 million Americans who have been out of work for more than 27 weeks. Many of them have been relying on unemployment benefits to get by, and the dollars spent in the program recirculate through the economy, helping support overall growth.

Ironically, the end of extended benefits may cause the reported unemployment rate to come down further, but for a troubling reason: Some of those 4.1 million people have likely been applying for jobs and remaining part of the workforce in order to maintain eligibility for benefits. If they decide to stop looking, instead spending their time on a family member’s couch, they will count not as unemployed but as having left the labor force entirely. For that reason, reading the labor market tea leaves over the coming months will require even more scrutiny than usual of trends in who is entering or exiting the job market.

Still, the new budget deal, assuming it is enacted, amounts to good news for U.S. economic growth in the year ahead. Maybe this is a sign of how little we have come to expect out of lawmakers that “not messing things up as much as in the past” counts as good news. But that’s the world we’re living in.

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Brad Plumer · December 11, 2013