Republicans Are Impeding U.S. Economic Recovery

There is no longer debate in Washington D.C. about a fiscal policy that will speed the nation's economy from it's anemic Great Recession recovery. Private sector bankers, investors and economists who normally disagree about everything agree on what is inhibiting economic growth. Recent economic data reinforces their position.

The nation’s unemployment rate would likely be a point lower, roughly 6.5 percent, and economic growth about two points higher this year if politicians had not cut spending and raised taxes as they have since 2011.

Following two years of battle between President Obama and Congressional Republicans, the two sides have fought to a draw over their practically diametrically opposed approaches to job creation and budget deficits. The consensus among those whose political ideology is divorced from their jobs to advise those who wish to increase wealth is as unanimous as it is clear: immediate deficit reduction is a drag on full economic recovery.

We are speaking about those people who advise others daily on the latest signs of economic growth, whether it's in housing, consumer spending or business investment. The ones who belong to the color of money is green political party. What they are saying is tax increases and especially spending cuts take money from an economy that still needs stimulus and is getting stimulus only through the expansionary monetary policy of the Federal Reserve, which is far too little to make much of a difference.

A chief economist at Pantheon Macroeconomic Advisors recently wrote to his clients that, “fiscal tightening is hurting.” Referring to government economic policy as “ongoing fiscal mismanagement,” he noted that while the recovery and expansion would be four years old next month, reduced government spending “has detracted from growth in five of past seven quarters.”

That period coincides with when the Republicans took control of the House in 2011, promising an immediate $100 billion in spending cuts. While they didn't cut as much as they sought at the time, a subsequent series of budget compromises with the President — while not as great as they wanted — will soon reduce annual discretionary spending for domestic and military programs to the lowest level in fifty years.

On the revenue side, President Obama was able to force Republicans to acquiesce in January to higher taxes from the "wealthiest" Americans, albeit not quite as many of the wealthy as he had planned.

However, worse in the macroeconomists’ view, both parties agreed not to extend a two-year-old cut in Americans’ payroll taxes for Social Security, reducing the amount of money in circulation and inhibiting spending.

From the beginning, the President has fought unsuccessfully to combine deficit reduction, including spending cuts and tax increases, with spending increases and targeted tax cuts for job-creation initiatives in areas like infrastructure, manufacturing, research and education. The President's formula reflects the recommendations of private sector analysts, investors and economists. Nevertheless, Republicans, traditionally the party of banks and businesses, have insisted on spending cuts alone and smaller government as the key to economic growth.

Speaker John A. Boehner argued on behalf of the Republicans’ policies Tuesday with reporters. “After four years of mediocre job creation, it’s obvious that we don’t need more tax hikes and more government spending,” he said. “We need smarter policies to make America more competitive and expand opportunities for everyone in our country.”

“We’re the ones pushing this town to do the right thing when it comes to the economy and jobs,” Boehner added.

While Boehner was arguing for more austerity, the Federal Open Market Committee, which sets policy for the central bank, noted minimal signs of improvement in the private sector. It added in a statement, however, "fiscal policy is restraining economic growth,” echoing public comments Fed Chairman Ben Bernanke has made for months.

In April, the International Monetary Fund said the United States would achieve further growth “in the face of a very strong, indeed overly strong, fiscal consolidation.”

Now, House Republicans plan to pass a measure that would direct the Treasury to “prioritize” debt payments if Congress and the President fail to agree on increasing the nation’s debt ceiling this year so the Treasury can keep borrowing money to pay all creditors. Under the bill, as tax receipts came in, the first priority would be paying creditors — like China — and only the would be expenditures like Social Security checks. Presumably, the Republican measure will die in the Democratic-controlled Senate, but these days in the Capitol, nothing is certain.

In a sign that the extreme right wing of the Republican Party is now driving policy in the House, the “prioritization” proposal first arose in 2011 from among the most conservative House Republicans. The same "extremists" who were fighting hardest against the White House on raising the debt ceiling and expressing disregard about default have now bullied the mainstream into joining ranks.

Again, private sector financial analysts and economic advisors dismiss the Republican “prioritization” idea as both unworkable and potentially dangerous, and count on Democrats to block it.

Gregory Daco, a senior principal economist at IHS Global Insight said the Republicans’ proposal was the kind that caused his clients to ignore the fiscal policy out of Washington, and rely instead on the Fed to for rational recovery mechanisms.

“Whenever I talk to our customers or clients, they sort of brush off everything that’s related to fiscal policy,” Daco said. “The view is, ‘Oh, it doesn’t matter.’"

“What we try to convey is that it does matter,” he said. “It is important in terms of growth. It’s also important in terms of confidence.”

Daco noted that the economy was much stronger than Europe’s largely because the United States initially opted for stimulus measures and allowed deficits to increase when the recession and financial crisis hit five years ago. European governments pursued austerity policies to cut their debts, further stalling economic activity and in turn inflating deficits.

The more recent austerity policies here are helping to bring annual deficits down, as a new report of the Congressional Budget Office shows, after four years of trillion-dollar shortfalls. Yet, most analysts would prefer that the measures had been timed for when the economy is strong and unemployment below 7 percent – another argument echoed by Obama.

“While I agree that the U.S. must get its fiscal house in order,” Jerry Webman, chief economist at Oppenheimer Funds, wrote, “I join the likes of the I.M.F. in cautioning that too much austerity, too soon, is likely counterproductive.”

 

Excerpts from"Economists See Deficit Emphasis as Impeding Recovery," by Jackie Calmes And Jonathan Weisman, The New York Times, May 8, 2013