What Republicans Want… I Don’t Know


gop_elephant__question_lgAs the fiscal cliff debate unfolded over these past couple of months, one thing became clear – the Republican position is murkier than ever. I honestly have no idea what the right wants concerning issues like entitlement reform, spending cuts, and the debt.

We know Republicans want tax cuts; specifically for the wealthy. The fiscal cliff became a battle waged solely over the Bush tax cuts for top earners. The small percentage of people affected by those top-tier tax cuts became the most important Americans, and the Republican Party was willing to let taxes increase on everybody in order to make an ideological statement.

The logic of this position is still baffling. Republicans were fighting to keep taxes low for the top 2 percent with the threat of raising taxes on 100 percent of the population. While arguing higher taxes would hinder economic growth, more than half of House Republicans voted to go off the cliff and raise taxes on everyone. It was an illogical position from the start.

We can be sure Republicans want to cut taxes for the rich; however, the same cannot be said for the middleclass and less affluent. Although there was very little discussion over the payroll tax cut, an EPI study concluded extending the payroll tax holiday would provide the greatest benefit to cost ratio of all the taxes that were scheduled to increase on January 1. Disappointingly, Democrats did not fight too hard for an extension, but it shouldn’t have even been a fight. Why would the Party so concerned about cutting taxes for the top 2 percent be against extending tax cuts for everyone else? Possibly because the payroll tax cut largely benefited the middleclass, not campaign donors “Job Creators.”

Delving deeper into convoluted Republican positions, one doesn’t have to listen to John Boehner too long to hear talk of reforming entitlements and getting the debt under control. Both ideas sound very conservative, but without any substantive policies back those ideas, it’s nothing more than base-appeasing rhetoric.

Concerning entitlement reform: throughout all the negations, Republicans proposed no actual entitlement reforms, instead, demanded President Obama lay out his own reforms. Besides being a cowardly political move (fearing reform proposals would be fodder for a future attack), why should that be the President’s responsibility? The President wanted to raise taxes and Republicans wanted to reform entitlements. It would make sense for each side to devise a plan according to their desire. The President did his part, but Republicans did nothing, and then blamed Democrats for inaction.

Furthermore, President Obama actually offered changes to Social Security. He proposed calculating Social Security benefits with a chained CPI method. Fancy talk for a benefit cut that slows growth in Social Security spending. Republicans rejected this offer because it would have meant going against their illogical and ideological position to never raise taxes (on the rich). So what do Republicans mean when they speak about entitlement reform? They offered no ideas of their own and rejected the one put forth by President Obama. To be fair, the Ryan Plan did offer changes to entitlements, but they were not reforms. They fundamentally changed the programs; drastically cutting benefits, with no evidence of actually working in practice.

Beyond entitlement reform, is talk of debt management. But where is the evidence Republicans care about decreasing the debt? Their whole position is to lower taxes and magically increase revenue. It is no coincidence that as tax rates are at all time lows, tax revenues have also been at all time lows. Republicans say closing loopholes will bring in revenue, but have yet to mention a specific loophole they are willing to close. They say they want to rein in entitlement spending, but haven’t offered any reforms to those programs besides simply cutting them. And they say they want to cut wasteful spending, but at the same time favor allocating more money to defense than the next 13 countries combined (and still want more!).

Truly, I am confused about the Republican position. Yes, they want lower taxes, but really only for the rich. Other than that, who knows? They talk big about reforming entitlements and decreasing our debt, but none of their policies reflect those beliefs.

Are Republicans Turning Keynesian?


With the election over, all attention is now being directed at the fiscal cliff. Basically, at the beginning of 2013 a series of tax cuts are set to expire like the payroll tax break and the Bush tax cuts. Along with the expiring tax cuts is a slew of mandatory spending cuts.  Both parties agree this could throw the country back into a recession. Both parties agree this contraction in spending will hurt the economy. And both parties agree this is something we need to avoid.

Before I continue, I’d like to rewind the clock a couple of years back to when Republicans took control of the House. In 2010 a Republican wave swept into Congress and changed the national dialogue from economic recovery to deficit reduction. They made the national debt and deficit the central issue. They claimed that addressing the nation’s spending problem would put us on a ‘path to prosperity.’  The story went something like this: We have to stop the reckless spending in order to restore confidence in the markets, this will in turn lead to an increase in investment, and we will then see a robust recovery. In economics this is known as expansionary austerity i.e. Europe’s recovery plan.

Now, fast-forward to today where the Republicans could get everything they wanted back in 2010 by simply doing nothing. If Republicans truly bought their argument that government was spending too much money, and the best way to improve the economy was to cut spending then Republicans should be more than willing to drive right off the fiscal cliff. The expiring tax breaks combined with the mandatory cuts would reduce government spending by over $700 billion just in 2013 (5.1% of GDP). The deficit hawks of 2010 should be drooling over this, but instead of embracing the fiscal cliff, Republicans agree with Democrats that this is an issue that needs to be addressed.

So, back in 2010 Republicans believed government spending was the problem and needed to be reined in, but now Republicans are arguing that cutting government spending will throw the economy back into a recession. Essentially saying that not only can government spending be helpful, but cutting it would be hurtful. The Republicans have officially becomes Keynesians!

So what happened?

Is the Republican Party really changing? No. Although Republicans talk about being fiscally conservative, and talk even louder about solving the ‘debt crisis’ – they really don’t care about the debt. The poster child of fiscal conservatism, Paul Ryan, devised a plan that would take over two decades to balance the budget.

What’s going on in the Republican Party is much more cynical. They are using the guise of fiscal responsibility in order to advance their agenda of changing the role of government. They believe in a minimalist government. Not one that actually tackles the debt problem, but one that cuts taxes for the wealthiest Americans and sets up a system for the rich to get richer, the poor to get poorer, and the middle-class to disappear. They envision an Ayn Rand world where government has no responsibility to take care of the less advantaged. Hence the reason why the Ryan Plan cuts Medicare, and makes even deeper cuts to Medicaid. And why the vast majority of the savings in the plan comes not from bloated defense spending, or slight tax increases on the top two percent of earners, but rather to programs that benefit the poor and the needy.

You may agree with this. You may think government should let everyone fend for themselves – but don’t be fooled into thinking this is fiscal responsibility. Don’t be fooled into thinking the only way we can balance our budget is on the backs of poor by cutting the programs on which they rely. And don’t be fooled into thinking that giving the ‘job creators’ more money will somehow lead to prosperity.

Republicans are not the party of deficit hawks or fiscal conservatives (which is why they don’t want us to go off the fiscal cliff). They are the Party that wants to fundamentally change the role of government in the economy. A role that no longer helps the most disadvantaged in society, but one that caters to the most advantaged

The Bush Tax Cuts Are Just Bad Policy


The upcoming election should help settle some of the debate in Washington, but one issue that will not be resolved November 6th, is what is known as the fiscal cliff. In December, when we bring in the New Year, it will be accompanied by sequestration (big spending cuts), and a spattering of tax increases.  One of the tax increases causing a lot of controversy is the expiration of the Bush tax cuts.

Republicans want to extend the cuts for everyone, while Democrats want to extend them for everyone except those making above $250,000.  This would return the top marginal tax rate to the Clinton era rate of 39 percent.  To those who read this blog often, it may not come as a surprise that I am in agreement with the Democrats on this issue, but for different reasons than you may think.

Republicans have called the Democrat’s idea just another form of class warfare. Democrats believe their plan works to even the playing field by ensuring everyone pay their fair share.

I think it’s much simpler than that – the Bush tax cuts are bad policy. Conservatives want to believe so badly that tax cuts for the rich are the solution to any and all economic problems. However, all those who claim lower taxes will increase growth, lower unemployment, and stabilize the debt are simply mistaken. The 1990’s and 2000’s provided a natural experiment on how tax rates affect the economy.

In 1993, when President Clinton raised taxes, the resulting years had much better GDP growth than the Bush years.

Similarly, the unemployment rate dropped every year after 1993. That trend was put to an end when Bush took office. Bush did see unemployment drop during his second term, but never to Clinton levels. Also, the decrease in unemployment, in part, was due to the housing bubble, and a massively over-leveraged financial system – 2 of the main drivers of this most current recession.

Finally, contrary to the belief that lower taxes will actually increase government revenue, Bush’s tenure was a mirror opposite of the Clinton years. While Clinton saw government debt to GDP decrease each year, Bush saw it rise. So much for tax cuts paying for themselves.

This is not to say higher taxes caused the good times of the 90’s, but clearly they were not a hindrance. The right’s insistence that lower taxes are the only path to recovery is misguided at best.  If tax cuts really are the solution then the economic climate of the 2000’s should have been much different. In other words, these graphs should look a lot different. The Bush tax cuts didn’t help with unemployment, didn’t boost growth, but did add substantially to the debt.

I know an economy is complex and not all these measures can be chalked up to tax rates. With that said, we can see that higher taxes are not necessarily detrimental, and lower taxes do not automatically equal growth. So all the big-idea-guys on the right have to come up with something else besides tax cuts.

Now, you might say, “if the Bush tax cuts are so bad then why not end them for all income levels?” Well, I believe that should be the goal. However, the Bush tax cuts have proved difficult to kill. Although the President pledged to let them expire in 2010, Republicans forced his hand and they were extended. The fact is ending all the Bush tax cuts is not feasible in the current political climate.

Ending them one step at a time provides the best chance to ending them in their entirety.  Also, let’s not forget, this recession is being driven by a lack of demand. Meaning increasing taxes on those who supply demand, middle-class families, may not be good policy for a struggling economy. Conversely, a tax increase on top earners, as we saw during the Clinton years, does not necessarily act as a drain to the economy.

The Bush tax cuts are bad policy.  They did not accomplish what they were supposed to and Congress should let them expire. Ending them on the high earners first makes ending them for everyone in the future more realistic, politically speaking. And ending them for the wealthy will not have the counterproductive economic impact that could arise from ending them on the middle-class.

Jobs Report – Good Not Great. And How to Make Next Month Better.


Friday’s jobs report was better than expected. The economy added 163,000 jobs, but unemployment ticked up to 8.3 percent. To be precise the unemployment figures changed very little, going from 8.22 to 8.25 percent. Although these are better numbers than we saw in May and June, they are still not cause for celebration.  163,000 jobs barely keeps up with population growth, and on average, only 151,000 new jobs are being added each month – at this pace it will take over a decade to return to pre-recession levels of employment. So, yes, better than expected, but not great.

And that’s really not all that surprising. Macro-economically speaking very little has changed in the past few months concerning economic policy. So it follows very little is going to change in the macro economy. Gridlock has paralyzed Washington into doing absolutely nothing. Republicans in the House are passing bills they know will not pass the Senate, and any bill with a chance to pass in the Senate is filibustered. Effectively, the President and Congress are writing legislation merely to make a political point. So, it’s not surprising we have seen weak growth these past couple of months, and it’s unrealistic to expect anything different when our lawmakers continue to play politics.

The shame in all this is much can be done to improve the country’s economic outlook.  I’m not asking for drastic steps, but rather simple, historically backed measures proven to lead to a strong recovery.

For one thing, the Fed has to start doing more. The Fed, headed by Chairman Ben Bernanke, has a dual mandate: promote stable prices (inflation/deflation control) and work toward maximum employment. Well, the Fed is keeping inflation under control (too under control), but it is not using all its tools to ensure maximum employment. One thing it could do is raise the target inflation rate. It currently is aiming at and achieving a 2 percent inflation rate. A modest increase in that number, not so great as to go against its mandate, could help with unemployment. I’m not asking for hyperinflation, but a target rate of 3-4 percent would help with debt relief as well as encourage investment. Both of which would help alleviate the high unemployment. This idea is not foreign to Mr. Bernanke.  As a professor at Princeton he echoed the same advice to Japan in the 90’s when they faced a similar crisis to ours. As Paul Krugman writes, “Chairman Bernanke should listen to Professor Bernanke.”

Of the available options to help the economy this should be the easiest to accomplish. The Federal Reserve is not supposed to be influenced by the politics of Washington – although this may not be the case anymore.

Moving onto things Congress should do… but will most likely not, even though many of these options have garnered bi-partisan support in the past.

Both parties are aware our infrastructure is in desperate need of repair – let’s fix that. Besides the fact infrastructure investment is smart productive government spending, and it helps keep us competitive with China, it also provides a boost to one of the weakest sectors of the economy – construction.


Congress also has to bring public sector employment back to historic trends. The chart below shows that if government payrolls had increased at the same rate as they did during the Bush years, there would be 1.7 million more people with a job.

I know conservatives want to cut government jobs because “government can’t create jobs!” Well, it can.  An economy operates by people spending dollars. It doesn’t matter if those dollars come from a government paycheck or a private sector paycheck – a dollar is a dollar. So in effect, a government job is no different from a private sector job. Increasing government payrolls will not only give people a paycheck, but it will boost demand, which in turn will help return the economy to normal.

Finally, Congress has to bring some certainty to the market.  I don’t always buy this argument because I think for the most part businesses know they have to pay taxes, and deal with regulations – that’s just part of doing business. With that said, settling the fiscal cliff issue would provide some extra certainty to the market. Now, the right takes this to mean we have to lower taxes, not necessarily though. If a business knows its taxes are going to be higher that still gives them certainty. It’s the not knowing that’s the problem.

Congress is going to have to compromise and just put an end to the fiscal cliff debate. There are so many things in the economy we can’t control; natural disasters, droughts, the Euro zone etc. we don’t need to shoot ourselves in the foot by creating uncertainty with something with which we do have control.

It’s doubtful any of this will get accomplished, which is disheartening. But knowing that this economy is fixable makes me optimistic. It is a matter of putting the right people in Washington – less than 100 days until the election.