Taking the Republicans to Task: (3) on Smaller Government, Smaller Deficits

 

            The current frontrunners in the fight for the Republican presidential nomination vary far more in their personalities and leadership styles than they do in their problem analysis and policy prescription. Ron Paul apart, their explanation of what is going wrong in contemporary America, and what therefore needs to be done to put things right, is in all its essentials both simple and similar. Taxes are too high. Business regulations are too intrusive. Government programs are too generous. The federal deficit is too large. Their solution is similarly simple and shared: elect a Republican President willing to cut taxes, remove regulations, reduce government spending and bring down the federal debt – do that, and the revival of the American economy awaits us all, just around the corner. 

Oh that it was that simple. But it is not. The claims being made, and the policies being offered, are not just similar: they are also profoundly misguided.

We have already taken the Republican candidates to task for the inadequacy and consequences of their policy proposals on taxation[1] and business regulation[2] – inadequacies which have been confirmed by more recent data on both corporate taxation[3] and the anti-regulation crusade.[4] But we have yet to deal with what is potentially the most economically and socially damaging part of the Republican policy trilogy – the claim that by drastically cutting government spending, these candidates can stimulate private economic growth and reduce the federal deficit without doing serious damage to the already thin American welfare net. This claim is central to the campaigns of all four candidates. The current Romney stump speech invariably contains the mantra of “more jobs, less debt and smaller government”[5] and his economic plan talks of “a federal government that has become bloated to the point of dysfunctionality.”[6] The Santorum campaign is currently promising “spending cuts of $5 trillion over five years…budgets that spend less each year than prior years,” and reductions in “the nondefense-related federal work force [of] at least 10%.”[7] Newt Gingrich is promising to balance the federal budget within five years; and Ron Paul is more ambitious still: proposing to cut $1 trillion off the federal budget in the first year, close five cabinet departments and reduce the presidential salary to less than $40,000.[8]

But though regularly made, the claim that rapid budget cutting will bring down the federal deficit and open the route to sustained economic growth is both disingenuous in its content and dangerous in its consequences.

• There is definitely casuistry here.[9] The Republican presidential candidates regularly claim to be overwhelmingly concerned with the size of the federal deficit, and regularly paint horrific scenarios of debt burdens to be carried by generations to come if drastic action is not taken now. Yet , Ron Paul apart, they all combine that claim with proposals on tax reform that inevitably make the deficit worse – worse over both the immediate period and into the longer term. Deficits are, after all, the result of revenues falling short of expenditure, and yet each major Republican presidential candidate is determined to cut that revenue further. The taxation proposals of each of them generates a projected shortfall in revenue that is greater than that currently proposed by the Obama administration, and all four candidates have declared their support for the 2011 Ryan budget proposals, even though those proposals projected forward a greater deficit still.[10] The non-partisan U.S. Budget Watch analysis of the competing budget proposals and taxation reforms make all this abundantly clear. They report that by 2021 the federal debt would rise by $4.5 trillion under Santorum’s policies and by about $7 trillion under Gingrich’s, as against $2.6 trillion under Romney’s. Only Ron Paul, they tell us, would bring the debt level down: and only then by making $7 trillion of budget cuts (three times more sweeping even than the cuts to programs proposed by Newt Gingrich) to offset his $5 trillion reduction in tax revenues.[11]

 

• In these Republican deficit-reduction scenarios, achieving deficit reduction while simultaneously reducing the volume of federal taxation can only be achieved by cutting further and further into the number and range of government programs. Ron Paul apart, none of the Republican frontrunners is an enthusiastic cutter of the Pentagon budget. Far from it: Gingrich, Santorum and Romney are all on record demanding a more aggressive US foreign policy and the creation of a military capacity commensurate to that aggression. Their cuts must therefore of necessity come from the federal government’s entitlement and welfare programs – come from cuts in Medicare and Medicaid, cuts in Social Security, cuts in welfare payments to the unemployed and the poor, and cuts via the denial of healthcare coverage to the 34 million low-paid Americans likely to be covered by the Affordable Care Act.  Ron Paul’s proposed cuts are not qualitatively different in this matter. They simply achieve even greater spending reductions by, in part, going after a Pentagon budget that is sacrosanct to the rest. With federal spending divided between military spending, health care expenditures and entitlement programs in almost equal proportions, cutting federal spending (especially if the Pentagon is to be spared) must involvement substantial reductions in spending on health care, pensions and welfare.

 

• The standard sleight-of-hand now regularly being used here by all four candidates to soften that reality is one that treats cuts in entitlement programs and welfare provision as issues best resolved at the state level. The Republican  quartet regularly argue that the best way for the federal government to reduce its expenditures is to reset items like Medicaid as block grants to the states – where the resulting welfare programs can be implemented free of federal bureaucracy, and free of “one-size-fits-all” Washington insensitivity to local preferences and needs. Nowhere in this “back to the states” solution to federal spending, however, is there much discussion by the would-be presidential candidates of the constitutional requirement carried by most states to balance their budgets. Falling tax revenues within such a constitutional straitjacket can only bring forward even faster the erosion of programs vital to the American poor, and leave us with an even greater patchwork of uneven welfare provision than we currently possess – and what we currently possess is patchy enough. It is not simply that the achievement of debt reduction in these Republican presidential programs will take second place to tax reform. It is also that the burden of deficit reduction in these programs will necessarily fall most heavily on those Americans least able to bear it.

 

• All that might just about make long-term social sense if the underlying premise of the Republican argument on the determinants of current rates of economic growth also made sense, but it does not. Republican presidential candidates like to frame the U.S. economic growth story as one of dynamic private sector investment and job creation needlessly blocked by excessive government spending (and regulation). Take the government out of the equation, so the argument regularly goes, and private sector job creation will return at full speed. But given the fragility of the U.S. economic recovery now underway, nothing could be further from the truth. U.S. corporations are currently awash with both profits and cash, and right now the prime blockage on the reinvestment of those profits and cash is not government activity. It is lack of confidence in future levels of consumer demand.[12] Cut government programs to the American middle class and the American poor and you deflate that demand even further. So let nobody claim – certainly not a Republican presidential candidate – that economic growth is currently sluggish only because non-defense federal discretionary spending is soaring and out of control. It is neither. It is not soaring. Nor is it out of control. It is currently running at 8.4% of GDP, not significantly higher than the 7.7% of GDP it absorbed in the late 1970s,[13] and is on a downward rather than an upward long-term trajectory. “According to the CBO, if nothing is done the primary deficit will bottom out at 2.6% of GDP in 2018 and then rise to 7.4% of GDP by 2040” with “remarkably, every penny”[14] of the rise beginning in 2020 coming from health care spending.  If we want to find the key area of spending that is soaring and out of control, we should focus instead on health care expenditure (public and private) instead, and leave federal discretionary spending alone.

 

• For there is a powerful Keynesian counter-case to be made here, and made on economic as well as on social grounds. After all, it was public spending through the American Recovery and Reinvestment Act which prevented the private sector from shedding even more jobs in 2009, 2010, and 2011:[15] and the latest CBO reports continue to find the residue of that spending adding to (not detracting from) the employment numbers.[16] Indeed, we are beginning to hear reports of how the original stimulus would have generated more jobs had it been even bigger, and that it would have been bigger if wiser and more progressive counsel had prevailed inside the first Obama economic team.[17] The budget cuts later forced on a reluctant Obama administration by the post-midterm Republican majority in the House of Representatives has already cost at least 200,000 public sector jobs and acted as a “powerful drag on the economy as a whole.”[18]  (Paul Krugman, in making that claim, estimated that, had state spending grown at Reagan-era rates during the Obama years, the U.S. would currently have 1.3 million more teachers, firefighters and police officers than are currently in post. As he said, “We’re talking big numbers here.”[19]) Those budget cuts have also fallen on programs which disproportionately service the American poor [20] – and the Republicans proposals would simply make matters worse. More budget cuts of the kind now being canvassed by Romney, Santorum, Gingrich and Paul can only intensify that lack of confidence in consumer demand, add to the numbers of those laid off at state and local level, and erode still further the meager resources currently available to the American poor.

 

The best route to long-term deficit reduction is sustained economic growth. The best route to sustained economic growth is a linked expansion of private sector investment and well-targeted public spending. Cutting taxes to the American rich might just fuel demand in the US luxury goods market, and add employment in industries making private jets – though more likely it will simply increase the flow of private savings to the tax havens abroad to which those jets already regularly fly.[21] Cutting taxes to the American rich can therefore be, at best, only a very circuitous and slow trigger to long-term deficit reduction. By contrast, not cutting taxes on the American rich, and instead targeting those greater tax revenues into vital infrastructure development projects – will generate immediate employment and demand and long-term enhanced economic competitiveness. You have to be either intellectually-challenged or a Republican presidential candidate not to see which of those two policy scenarios makes most economic and social sense; but then these days intelligence is apparently not a premium requirement of Republicans seeking high office.

If intelligence won’t win the day, what about self-interest? Maybe that will. In their stump speeches, Republican presidential candidates like to create the impression that entitlement programs are things given to Democratic voters and paid for by Republican ones. But nothing could be further from the truth. The very programs whose size and viability are most jeopardized by their deficit-reduction proposals are often most heavily utilized in states with Republican majorities.[22] As early as 2004, the Tax Foundation issued a fascinating report documenting that 17 of the top 20 states receiving more in federal spending than they paid in federal taxes were red states, and that 24 of the top 32 were similarly states won by George W. Bush in 2000.[23] What was true then is true now: the New York Times reported[24] late last month that “blue states generally export money to the federal government,” while “red states generally import it.”[25]  Tea-party activists, when surveyed individually, seem well aware of that. There is no massive tea-party activist majority for the dismantling of Social Security, Medicare and Medicaid, even though those three programs make up the bulk of the discretionary expenditure so directly targeted by the four men currently seeking their electoral support. On the contrary, all the most careful recent research into the concerns and political priorities of tea-party activists shows that tea-party activists “are in general supportive of programs they see as helping Americans like themselves. In polls, nearly half of Tea Party supporters report receiving benefits from Social Security or Medicare, and a majority of Tea Party supporters think these programs are worth their cost to taxpayers.”[26]

The intelligence of Tea Party supporters should not really surprise us, for the evidence of the dangers of drastic federal spending cuts is readily available on the global stage if people care to look. The philosophy and policy proposals that would be launched upon us in 2013 if a Republican returns to the White House are already playing themselves out in the UK. The Cameron-led coalition government began life in 2010 with a drastic austerity budget that left the economy with negative growth in the last quarter of 2011 and unemployment at a 17 year high. Even The Wall Street Journal has recently reported growing pressure in the UK for renewed stimulus measures.[27] And if that is not evidence enough, there is always the Eurozone crisis and the appalling state of affairs in contemporary Greece, where the EU finance ministers imposing yet further austerity measures on the Greek Government were informed by their support staff “that even under the most optimistic scenario, the austerity measures being imposed on Athens risked a recession so deep that Greece will not be able to climb out of the debt hole over the course of the three-year bail-out.”[28] Excessive austerity measures deepen recessions. They do not solve them.

Anyway, we are not Greece. In Washington, unlike in Athens, borrowing is cheap. With U.S. five year Treasury bills selling easily at an interest rate of around 1% – a historic low, and effectively a negative real interest rate – it is currently less expensive “for the U.S. to finance its debt now than it was during the surpluses of the 90s.”[29]  With money this cheap, this is exactly not the time for the federal government to cut programs, but rather the time for the government to borrow to invest, the better to lay the infrastructure foundations for long-term competitiveness and private sector growth. Why cut now, when money is so cheap? It literally makes no sense.

So let no candidate tell you that cutting federal spending now is the surest route to rapid deficit reduction. It is not. No less a key player in the Republican drama than Mitt Romney inadvertently said as much in an ill-disciplined moment in Michigan last month. He was reported as saying that “if you just cut – if all you’re thinking about is just cutting spending – why, as you cut spending you’ll slow down the economy.”[30] He was right then. He is not right now. And why give him street credit for his accidental moment of truth, when the alternative is to support an administration which, for all the modesty of its spending plans, is not guided by the Republicans’ philosophical hatred of federal spending on entitlement programs. The spending and deficit reduction proposals now on offer from each of the would-be Republican presidential candidates need to be called out for what they are: economic and social vandalism masquerading as sensible policy. The Republican proposals on federal spending and deficit reduction need to be rejected as needlessly destructive of vital public services. The route to a better America does not lie through the infliction of greater pain on those among us least able to bear it. Millionaires may find tax increases painful, but if they really want to know pain, they should try living on welfare instead.

 

Tags: 2012 election, federal deficit, Gingrich, Greek crisis. UK Coalition Government, Keynesian counter-case, Republican Presidential Candidates, Romney, Ron Paul, Santorum, taxes on the rich, welfare cuts

David Coates holds the Worrell Chair in Anglo-American Studies at Wake Forest University. He is the author of Answering Back: Liberal Responses to Conservative Arguments, New York: Continuum Books, 2010.

He writes here in a personal capacity.

This entry was posted on Thursday, March 8th, 2012 at 8:36 am, was written by David Coates, and is filed under US Blog. You can leave a response, or trackback from your own site.