Bipartisan Budget Deal Reached; No Extension Of Unemployment Benefits Means Unemployment Rate Set To... Plunge

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Moments ago, news hit that democrat negotiators Patty Murray, and republican Paul Ryan reached a bipartisan deal to ease the automatic budget cuts by $60b. The deal calls for auctioning of govt airwaves, increased premiums for pensions backed by PBGC, a congressional aide told Bloomberg’s Heidi Przybyla. A press conference will be held at 6pm to unveil the bipartisan budget agreement, according to e-mailed statement. As a result, a January 15 government shutdown will be avoided.

More from the AP, via NBC:

Congressional negotiators reached a modest budget agreement Tuesday to restore about $65 billion in automatic spending cuts from programs ranging from parks to the Pentagon, with votes expected in both houses by week's end.

 

Officials said the increases would be offset by a variety of spending reductions and increased fees elsewhere in the budget totaling about $85 billion over a decade, enough for a largely symbolic cut of roughly $20 billion in the nation's $17 trillion debt.

 

Among them is a requirement for federal workers to make larger contributions to their own pensions, as well as an increase in a federal security fee that would add $5 to the cost of a typical roundtrip flight.

 

Officials said Democrats had failed in their bid to include an extension of benefits for workers unemployed longer than 26 weeks. The program expires on Dec. 28, when payments will be cut off for an estimated 1.3 million individuals.

 

Announcement of the deal came in the form of a statement that the two negotiators, Sen. Patty Murray, D-Wash., and Rep. Paul Ryan, R-Wis., who planned a news conference to announce details. The lawmakers chair the budget committees in the two houses of Congress, and negotiated the deal in secretive talks over recent weeks.

 

Officials said that under the agreement, an estimated $65 billion in automatic spending cuts would be restored through the end of the next budget year, which runs to Sept. 30, 2015.

 

Officials who described the details in advance of the news conference did so on the condition of anonymity, saying they were not authorized to speak on the record.

 

The same was not true of conservative organizations, which attacked the proposal as a betrayal of a hard-won 2011 agreement that reduced government spending and is counted as among the main accomplishments of tea party-aligned Republicans who came to power earlier the same year in the House.

 

Americans for Prosperity issued a midmorning statement saying that GOP lawmakers should uphold current spending levels. Otherwise, the group said, "congressional Republicans are joining liberal Democrats in breaking their word to the American people to finally begin reining in government overspending that has left us over $17 trillion in debt."

 

A day earlier, Heritage Action issued a similar broadside, saying it could not support a deal that "would increase spending in the near-term for promises of woefully inadequate long-term reductions." The group played an influential behind-the-scenes role earlier this fall in events that led to a partial government shutdown, supporting a strategy of refusing to provide needed funds for federal programs until the health care law known as "Obamacare" was defunded.

 

For their part, liberals were unhappy that the deal was likely to lack an extension of benefits for unemployed workers more than 26 weeks off the job.

 

The party's leader, Rep. Nancy Pelosi of California, said at one point last week that her rank and file would insist on an extension for the unemployment program as a condition for supporting a budget deal.

 

The White House pointedly refused to support her position, and she later made additional comments that her staff characterized as a clarification.

 

Given the internal GOP divisions in the House, Speaker John Boehner is likely to need Democratic votes to approve any deal by Ryan and Murray. It was not immediately clear how many Democratic lawmakers would support a plan that lacked an extension of unemployment benefits.

 

Some Democratic officials suggested a possible two-step solution. It included swift passage of any budget agreement that emerges, and then adding an extension of unemployment benefits to must-pass legislation early next year, perhaps a measure to reverse a looming cut in payments to doctors who treat Medicare patients.

 

The bipartisan push for a budget agreement stems from automatic cuts that are themselves the consequence of divided government's ability to complete a sweeping deficit reduction package in 2011.

 

If left in place, the reductions would carve $91 billion from the day-to-day budgets of the Pentagon and domestic agencies when compared with spending limits set by the hard-fought 2011 budget agreement.

 

Support for a deal to ease the reductions is strongest in Congress among defense hawks in both houses and both parties who fear the impact on military readiness from a looming $20 billion cut in Pentagon spending.

 

The White House wants a deal for a same reason, but also to ease the impact of automatic cuts on domestic programs from education to transportation to the national parks.

Since there was a failure to obtain an extension of benefits for workers unemployed longer than 26 weeks, it likely means that, as explained before, the labor force is about to collapse by up to 1.3 million, paradoxically leading to an even faster drop in the unemployment rate. Recall:

If the Congress does not pass the bill to extend emergency aid - set to expire Dec 28th - then up to 1.3 million more people will be added to that list of 91.5 million already our of the labor force (and another 800,000 more to come in further months)...

 

This has profound implications for the oh-so-important unemployment rate that  the Fed is so dependent upon...

 

JPM's Feroli: One observation that could set an upper bound on thinking about a participation effect is to hypothesize that all 1.3 million EUC claimants exit the labor force after benefits expire in 1Q (again, should Congress allow that to happen). In that case, the unemployment rate would fall by 0.8%-pt, obviously an extreme example. Some of the Fed studies can help to narrow the range of outcomes.

 

One of the more recent works (Farber and Valletta from the San Francisco Fed) indicates that about a fifth of long-term unemployment is due to extended benefits. With just over 4 million long-term unemployed recently, this would imply that the absence of extended UI benefits could lower the unemployment rate by 0.5%-pt.

 

This will directly impact the Fed's credibility to manage the economt in a "data-dependent" manner:

 

JPM's Feroli: Setting aside the normative aspect of whether from a public policy perspective this is a desirable or undesirable outcome, such a fall in the unemployment and participation rates could create some tricky choices for Fed policymakers as they assess the health of the labor market.

 

Remember, while consensus is convinced Taper is a positive (the Fed wouldn't pull back unless everything is golden); we suspect, and today's Treasury Auction Failure supports that thesis, that the Fed is looking for excuses to Taper (or shift policy away from QE)...

Finally, as a result of the implicit $5 billion a month fiscal boost, a near-term modest taper is now even more likely.