Saturday, March 26, 2011

The Republican Plan For Growing The Economy? Cut Everyone's Wages.

Over the past few months, we've watched as the newly-elected Republicans have conducted a wide-spread assault on women's rights, unions, Social Security and Medicare, education, and other programs to help those in need under the cover of cutting government spending. Although they said that job creation was the first priority back in November, what they've been focusing on is rolling back progressive achievements, and reducing "big government."

How do they think this is helping the economy and creating jobs? There's an article over at the National Journal which looked through Boehner's explanation of how that would work.

The paper makes the party’s anti-Keynesian case that fiscal consolidation (read: spending cuts) can spur immediate economic growth and reduce unemployment. But in making that case, the Republicans may also have given Democrats some political ammunition.
For example, the paper predicts that cutting the number of public employees would send highly skilled workers job hunting in the private sector, which in turn would lead to lower labor costs and increased employment. But “lowering labor costs” is economist-speak for lowering wages — does the GOP want to be in the position of advocating for lower wages for voters who work in the private sector?
Apparently, yes. The justification for why they would believe that this would work is that they looked at some countries which cut government spending to reduce their deficit, and the economic growth that they experienced. The problem with their analysis?
To establish that spending cuts can lead to near-term growth, the study looks to the experience of several small European countries. Some economists say the nations cited don’t provide a useful model to the United States because those countries took steps to blunt the impact of cuts — such as devaluing their currency to promote exports — that are improbable in America, especially with monetary policy already stretched to the limit.
“Much of this study relies on the growth performance of a few (very) small open economies — Sweden, Canada, New Zealand, notably — after 1994,” said University of Texas economist James Galbraith, who was executive director of the JEC in the early eighties. “It’s easy to look good if you are a small country with a freshly devalued currency selling into a world boom. The ‘lessons’ will not apply to the United States, which cannot just contract domestically, devalue the dollar (sacrificing our reserve-currency position) and expect the rest of the world to bail us out by buying our exports.”
In other words, just cutting government spending to reduce the deficit is not going to increase the economy by itself. There's a set of actions - and specific circumstances - that have to be in place for that, and it does not apply to this country. Ezra Klein takes a hard look at this as well:
That said, the IMF report does say two things that back up conservative preferences: 1) cutting deficits by cutting spending does appear to be better for the economy than cutting deficits by raising taxes, so it’s not crazy to want to see spending cuts predominate over tax increases, and 2) over the long-term, cutting deficits does help the economy. Unfortunately, over the short-term they do real harm: “A fiscal consolidation equal to 1 percent of GDP typically reduces GDP by about 0.5 percent within two years and raises the unemployment rate by about 0.3 percentage point.” If you were to take this evidence seriously, you’d wait a few years to start cutting deficits, but when you did it, you’d prefer spending cuts to tax increases.
But, as he also points out, taxes in those countries were higher (much higher) to begin with than they are here, so the effect of raising taxes might be quite different. It's also worthwhile to point out that all the countries mentioned as examples by the Republicans have a much greater social safety net - including universal healthcare programs - than does the the United States. The National Journal article points out that economists and the bond market don't agree with the Republicans:
Ultimately, the argument comes down to what policymakers see as the key problem in the economy. Is growth slow because businesses and consumers fear higher taxes or because businesses don’t have enough demand for their products to expand? Republicans are arguing the former, but many economists — and the bond market — believe the latter is closer to the truth. Moody’s bond-rating agency warned on Thursday that the U.K. is in danger of having its debt downgraded due to worries about slow growth resulting from consolidation.
In order to "grow the economy," the Republican plan will reduce demand, increase the unemployment rate, and drive down wages. We already know that they're not too fond of the minimum wage. It turns out that they don't just think that government workers make too much money. They think everyone (who is not them) makes too much money.

What's the Republican plan to make America competitive with other countries? Turn us into one of the countries that businesses sent manufacturing to: Poorly educated, low-paid, no regulation, and no protections. With the wealthy in charge, of course.

 
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