Republican lemming economic policy

Odds are we're heading for a government shutdown on April 8. The Republicans will not budge on deficit negotiations and there's no reason for the Democrats to give them what they want. They aren't serious about deficit reduction that actually makes any economic sense. The government will have to raise the debt ceiling above it's current level of $14.3 trillion or the government has to stop functioning.

The Republicans have shifted the goalposts once again and now insist on a Balanced Budget Amendment as a condition for raising the debt ceiling. Sounds reasonable on paper but for the Republicans, defense is off the table, as is any tax increase or even reform of corporate taxes so companies like GE and Exxon might actually have to start paying taxes.

The math doesn't add up. The Amendment wants to cap spending at 18% of current GDP. Spending is currently running at 25% of GDP. To achieve that goal $1.6 trillion out of a spending request of $3.83 trillion. Take out defense at $895 billion and interest on the debt at $251 billion and your left with cutting $1.6 trillion out of $2.7 trillion or almost 60% of all spending including social security, medicare and medicaid.

The modest $61 billion in cuts that the Republicans has been proposing will result in the loss of 700,000 jobs and cut annual GDP by at least 1.5% according to Goldman Sachs. Change that $61 billion cut to $1.6 billion and the economy will crash and burn. The Republicans can spew their bullshit about government spending not creating jobs and not contributing to the economy from now until the cows come home but it's one big lie.

They have obviously decided that they will come out smelling like roses in the event of a government shutdown. They tried this under Clinton and got their asses kicked for their trouble. Four months ago, around the time of the election they might have been able to get away with it but in this short period their brand of radical extremist policies has been taking a beating. People in states such as Wisconsin, Michigan, Ohio, Florida, Georgia, Arizona and others are seeing this first hand. The polling currently shows that the newly elected governors of those first four states in the list would all take a solid beating if the elections were re-held today.

According to them it's all the fault of those greedy public union employees and the high corporate tax rate that was paid by only one out of the entire Fortune 500. That was CVS and I wouldn't be surprised if their entire tax department had either been fired by now or at best read the riot act.

This chart shows where the real problem is.

 What stands out is the precipitous decline in tax revenues as a percentage of GDP since 2000.  The first decline was from the Bush tax cuts, the only time in American history that a tax cut has been enacted while simultaneously paying for a major war which Iraq/Afghanistan turned out to be.  When Clinton left office revenues were a little more than 20% of GDP and spending was at 18%.

The Bush tax cuts exposed the Republican economic theology of the 'trickle down' theory that cuts will actually generate more tax revenue as a fantasy.  It didn't hold true in the Reagan tax cuts either.  From 2001 to 2005 as the tax cuts took hold revenue slid 4% of GDP.  The rise in the next few years was due more to a rising stock market and the housing bubble than anything else but that 2% rise was wiped out in the first two years of the recession.  For 2011, tax receipts are expected to hit a low of 14% of GDP.  Even if spending can be cut to 18% of GDP (which it can't) it will still fall 4% short of a balanced budget.


The projected closing of the gap in the above chart is a best case scenario and assumes the Bush tax cuts expiring in two years as they are currently set to do.  As long as the Republicans refuse to touch the defense budget and refuse to consider any tax increases or reform of corporate tax loopholes and tax credits, the gap will at best close marginally as the economy presumably recovers slowly.

Worse yet are some of the unintended potential consequences of some of the GOP cuts should they pass.   The $750 million cut for low income pregnant women and infants, for example will more than likely lead to more premature and difficult births resulting in increased hospitalization costs borne by the taxpayer, negating any potential savings

The dual myths that lower corporate taxes and lower taxes for the wealthiest Americans lead to more job growth  has become a theology that is being proved empirically wrong.  One need look no further than the case of General Electric which pays no taxes yet exports jobs and is now intent on squeezing more wage and benefit concessions out of its unions which will have the same net effect as a tax increase on the middle class which is already feeling the pain of the recession far more acutely than the rich and large corporations.

Poll after poll shows shows that the average American is far more concerned with the economy and jobs than with the budget deficit  In Washington neither the politicians nor the punditocracy seem to understand that.  It's a class war disguised as an incoherent economic policy with enough platitudes to have bamboozled enough voters in the last election  Voters in Wisconsin are learning this very quickly  As long as the Democrats stand their ground a government shutdown will hurt the Republicans far more considering the extent of their overreach just in the past couple of months.