U.S. Sens. Bob Corker, R-Tenn., and Claire McCaskill, D-Mo., have introduced the Commitment to American Prosperity Act, which would phase in hard caps on government spending over a 10-year period and impose sequestration, or an automatic spending cut, if the caps were breached.
But in two new studies, Economic Policy Institute experts say the CAP act could severely harm both the social safety net which millions of Americans rely on, and the economy, especially during downturns like the Great Recession.
"Spending caps are much better rhetorically than they would be in practice," says Rebecca Thiess, policy analyst at EPI. "Rhetorically they sound very reasonable and responsible; [but] in practice they would decimate what government can spend on really important programs."
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The CAP Act would mandate that federal spending be reduced from its currently projected 2011 level of 24.1 percent of gross domestic product to 20.6 percent of gross domestic product by 2022. The 20.6 percent figure equals the average level of spending between 1970 and 2008, and does not account for an aging population, rapidly-rising health care costs and costs related to recently-passed legislation.
While the CAP Act would impose sequestration if federal spending levels exceeded permissible spending levels, Congress could avoid this by constructing a federal budget that stayed within the mandated targets, explains the report, "Why spending caps are poor policy: Understanding the costs and constraints of capping spending as a share of the economy."
It also finds that forced spending cuts between 2008 and 2011 would have pushed the unemployment rate an average of one percentage point above actual levels. The CAP Act would have severely limited countercyclical fiscal policy, all but ruling out the 2009 Recovery Act and subsequent emergency unemployment benefits and state fiscal relief.
"The fact that the government was able to come in during this terrible recession when businesses weren't hiring, when consumers weren't buying anything and boost the economy a little bit, that really helped us get through it," Thiess says.
The other study, "Unbalanced budgeting: Federal spending cap may endanger Social Security," explores the impact the CAP Act could specifically have on Social Security. It finds that across-the-board cuts would reduce Social Security outlays by 13.6 percent by 2021. If cuts were triggered by sequestration, outlays could fall 16.4 percent by 2021. In both scenarios, these cuts could lead to major benefit cuts, as well as job losses in the hundreds of thousands.
Finally, both studies find that a balanced budget amendment, such as the ones proposed by Sen. Hatch and Rep. Goodlatte, could result in even more severe cuts to federal spending.
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