The GOP’s Long Term Economic Plan Will Always Be To Cut Taxes And The Safety Net
Yesterday’s jobs report was just a continuation of the slow but steady improvement in the US economy. In January, 200,000 new jobs were created but that was somewhat offset by a downward revision of 24,000 for the prior two months. The unemployment rate, the employment-population ratio, and the labor force participation rate were all unchanged.
But the number that seemed to resonate the most from this report was that average hourly earnings went up by 9 cents for the month. This seemed to set off another media firestorm about how wages were finally rising and we were seeing indications that what appears to be near full employment was finally having its usual effect on wages. But there was an 11 cent gain in December, so, while recognizing this is just one month’s number, it was actually a slowdown from the prior month. It does not, however, detract from the fact that indeed wages are actually increasing. For the year ending in January, wages were up by 2.9%, which sounds pretty good.
But the reality is that when we look at inflation adjusted wages rather than just the nominal numbers, the situation looks far less rosy. Kevin Drum provides this handy graph that shows that, yes, inflation adjusted wages have taken a light bump up in the last few months but they are actually still well below wage growth we saw in 2015 and 2016. I’m pretty sure we didn’t see the press rejoicing about the rising wage growth back then.
Now, if wages keep on increasing, there is no doubt that Trump and the Republicans will take credit for it. I saw one Republican operative on TV claiming that the record low black unemployment that Trump crowed about during the State of the Union was the result of the tax cut legislation, an actual impossibility but that doesn’t stop the GOP these days. Unfortunately, in January, black unemployment rose to 7.7%, the largest increase since 2012, kind of blowing a permanent whole in that already crackpot theory.
But if the economy actually begins to sour, which is not unthinkable considering the length of the current recovery, Republicans already have a plan to benefit. Martin Feldstein, chairman of Reagan’s Council of Economic Advisers, described the details in an article a few days ago.
Feldstein lays out some of the warning signs in today’s economy that perhaps signal a coming downturn, especially concern about the financial industry. Says Feldstein, “A decade of excessively low interest rates has pushed asset prices to extreme heights. The real yield on ten-year Treasury bonds is approximately zero. The price-earnings ratio of the S&P 500 share index is about 70% above its historic average. If these and other asset prices reverted to their historic benchmarks, investors would suffer losses in excess of $10 trillion, leading to declines in consumer spending and business investment”, and triggering another recession.
Unfortunately, were that to occur, the traditional methods for combatting an economic downturn are just not available. Normally, the Federal Reserve would sharply and quickly lower interest rates in an effort to offset the economic damage. But, because we are still fighting are way out of the Great Recession, the current fed funds rate is still a remarkably low 1.4%, although soon to be rising as those supposed rising wages will prompt some quick rate hikes, with one scheduled for March already. Even so, there simply is not that much room to cut rates that would make an impact. Furthermore, the Fed has still not unwound its unconventional policies to help keep long-term rates down, only just starting to unwind the bond purchases under its quantitative easing programs. And with the current makeup of the Fed, it is doubtful that it would renew that program.
So, with the traditional methods sidelined, Feldstein proposes doing exactly what Republicans refused to let Obama and the Democrats do to mitigate the effects of the Great Recession. According to Feldstein, “The responsibility for stimulating the economy in the next downturn will therefore fall to fiscal policy — changes in taxes and government spending.” Amazingly, that dovetails perfectly with some long-time Republican economic policy.
To deal with an economic downturn, Feldstein recommends that Republicans extend the 2017 tax cuts beyond their expiration date of 2025 in order to “stimulate the economy”. In addition, promoting an economic recovery would also require increased government spending which Feldstein proposes should be made in infrastructure and military spending.
Now I’m pretty sure that Democrats would go along with a real infrastructure plan. But, based on what Trump has proposed, it’s no plan at all. There is no new federal spending and therefore no real economic stimulus. And, considering the state of the current Republican party, you have wonder if Republicans would even go for that. But you can be sure they will be all for extending those tax cuts and spending more on the military, their two favorite hobbyhorses.
Feldstein, to his credit, at least acknowledges the danger that the increasing debt created by the Trump tax cuts creates for an effective fiscal response to an economic downturn. Says Feldstein, “The high level of the national debt — about 77% of GDP now and heading to 97% at the end of the next ten years — would create strong resistance to either tax cuts or increased spending. But a significant economic downturn with limited scope for Fed action would leave Congress with little choice”. In fact, on independent analysis suggests that by 2019 we will be running the largest deficits as a percentage of GDP other than the Great Depression, the Great Recession, and the recession of the early 1980s. And we would theoretically be running these deficits during a period of economic growth.
For Republicans, the game plan is clear. If the economy keeps improving, deficits will still be high and Republicans will call for cutting government spending, which means cutting more of the safety net and going after entitlements. If the economy goes south, then a Democratic President in 2020 will have to clean up the mess and again the Republicans will cite the increasing deficits and debt in order to block any Democratic attempts to provide a fiscal stimulus without cutting taxes. Republicans then retake the White House in 2024 and immediately extend the 2017 tax cuts in order to provide a fiscal stimulus they denied the Democrats by other means. Which creates even higher deficits and a faster growing debt and more demands from the GOP to cut spending. Rinse and repeat. We’ve been dealing with this abusive cycle for almost 30 years now and it seems it will never end.
If it ever is to end, Democrats must learn the lesson of Bill Clinton and Barack Obama. Clinton’s lesson is that raising taxes on the rich will not constrict the economy. Obama’s lesson is that if you give people the things they really need, like healthcare, it becomes quite difficult for Republicans to take that away. As Atrios says, “Give people nice things, and make it easy.” That means taxing capital, capital gains, and high incomes at far higher rates, while providing payroll tax cuts, quality, affordable health care, and higher Social Security payouts. As Republicans have shown, you can do one hell of a lot through budget reconciliation.
Originally published at tidalsoundings.blogspot.com on February 3, 2018.