“…there’s remarkable consensus among mainstream economists, including those from the left and right, on most major macroeconomic issues.  The debate in Washington about economic policy is phony.  It’s manufactured.  And it’s entirely political…and in a particular direction: Angry Republicans have pushed their representatives to adopt positions that are at odds with the best of modern economic thinking.  That may be good politics, but it’s terrible policy.”  Betsy Stevenson and Justin Wolfers

The above is excerpted from an article published in Bloomberg this past summer entitled “The Economic Policy Debate is a Sham”.  The University of Chicago’s Booth School of Business conducts a recurring survey of about 40 economists from around the United States.  These economists include Democrats, Republicans, and independents from top economic departments across the country.  They are united only by their first rate credentials and interest in public policy.  And there is a remarkable consensus amongst them regarding not what the right answers are, but rather ‘the best reading of murky evidence’.  And the debate in Washington has become ‘completely unmoored’ from this consensus. And in a particular direction as Republican representatives are adopting more extremist positions that are at odds with the best of modern economic thinking.

Contrary to Republican positions, the economists’ consensus includes: the Obama stimulus helped reduce unemployment; the bank bailouts (although despised) actually helped; that market forces, not Obama energy policy, is the cause of higher gasoline prices; that tax cuts do not increase government revenue by markedly stimulating the economy and thus do not pay for themselves.

This paper will examine the effects of policy on job creation, job recovery following recent economic downturns, austerity (sharp spending cuts) on economic recovery and debt in countries where it has been imposed, and national debt – all being important considerations in this year’s general election.  Additionally, claims regarding ‘failed stimulus’, Obama energy policy causing higher gasoline prices, and getting tough with China over its currency are considered.

In today’s politics, especially during this election cycle, we are living in a world where facts no longer seem to matter.

Job Creation

Evidence does not support that tax cut policy, largely favoring the wealthiest (‘job creators’), has stimulated job growth or employment recovery following economic downturns.

Total non-farm payroll statistics compiled by the Bureau of Labor Statistics is the standard for measuring job growth and it has been summarized during presidential terms in the chart below (ref).   Supply-side tax cut policy initiated in 1981 (‘Reagan-onomics’).  To examine effects on job creation, this discussion will include the presidential terms beginning with Carter’s, the one immediately preceding Reagan.   If tax cuts largely favoring the wealthy (the ‘job creators’) stimulate jobs growth, it should be reflected in the numbers during periods of time where that policy has been in place – and it simply is not.

Job creation, starting with the federal fiscal year following September (a newly elected president inherits the budget of his predecessor through September of the year he takes office), lagged in 4 0f the 5 presidential terms during which supply-side tax cut policy was in place.  The much maligned Carter years produced more jobs than Reagan’s first term, GHW Bush’s term, and both GW Bush terms.  The strongest overall job creation occurred during the Clinton years where income tax rates were raised largely affecting those with high incomes.  And despite claims of a failed economic stimulus, job growth during the Obama presidency to date has been stronger than either of the GW Bush terms or the total of those two terms.

 

U.S. president	Party	Term years	Start jobs (Jan)	Start jobs (Sept)	End jobs (Jan)	End jobs (Sept)	Created (Jan)	Created (Sept)	Ave annual increase (Jan)	Ave annual increase (Sept)
Jimmy Carter	D	1977–1981	80,692	83,532	91,031	91,471	+10,339	+7,939	+3.06%	+2.30%
Ronald Reagan	R	1981–1985	91,031	91,471	96,353	98,023	+5,322	+6,552	+1.43%	+1.75%
Ronald Reagan	R	1985–1989	96,353	98,023	107,133	108,326	+10,780	+10,303	+2.69%	+2.53%
George H. W. Bush	R	1989–1993	107,133	108,326	109,726	111,358	+2,593	+3,032	+0.60%	+0.69%
Bill Clinton	D	1993–1997	109,725	111,360	121,233	123,418	+11,507	+12,060	+2.52%	+2.60%
Bill Clinton	D	1997–2001	121,231	123,418	132,466	131,524	+11,233	+8,106	+2.24%	+1.60%
George W. Bush	R	2001–2005	132,466	131,524	132,453	134,240	-13	+2,716	-0.00%	+0.51%
George W. Bush	R	2005–2009	132,453	134,240	133,561	129,734	+1,108	-4,506	+0.21%	-0.84%
Barack Obama	D	2009–2013	133,561	129,734	132,461 (January 2012)	133,500 (through Sept 2012)	-1,152 (January 2012)	+3,766 (through Sept 2012)	-0.28% (January 2012)	+0.97% (through Sept 2012)

**Approximate

An article published in CNN Money (ref) in 2010 (“Strongest jobs recovery in decades. Seriously”) examined job growth following recent economic downturns.  A graph from that article is displayed below.

 

Tax cuts are supposed to work quickly by making money immediately available to those who will spend it into the economy and thus put pressure on companies to hire.  However, during GW Bush’s first term a ‘jobless recovery’ followed the relatively brief ‘dot-com bust recession’ where it took 22 months to achieve sustained job growth.  And following the ‘Gulf War oil shock recession’ (July 1990-March 1991) it took 12 months to achieve sustained job growth (GHW Bush’s tenure).

If tax cut policy did not have a stimulative effect on job recovery following recent economic downturns, why should we believe that it will now?

Austerity

The Republican position in fixing an ailing economy involves sharp cuts in government spending, known as austerity, as opposed to the Democrat’s position of accelerating recovery by sustaining public spending, i.e., putting it into the hands of those who will likely spend it (ref).  However, the International Monetary Fund’s World Economic Outlook report shows that the world’s economy is doing worse than expected and that “a disproportionate share of the bad news is coming from countries pursuing the kind of austerity policies Republicans want to impose on America.”

Krugman summarized elements of that report and excerpted data in a recent post (ref).  The figure below is a scatterplot of fiscal consolidation and growth.

The IMF report also examined growth forecast errors and fiscal consolidation plans in the following figure.

Krugman concludes: “The reality is that everything that has happened economically since the turn away from stimulus to austerity, from interest rates to inflation to output, has refuted the doctrine the GOP is pushing”.

And data released from Eurostat, the EU’s data agency, is in agreement with the IMF report (ref).  The economies of Greece, Ireland, Portugal and Spain have contracted sharply under austerity measures, and “the size of the debts relative to economic output has soared”.  In short, austerity has been associated with a contraction of the economy and increasing debt in countries where it has been imposed.

So, with that information in hand, why would we want to pursue sharp cuts in spending during a recovery as a way to improve the economy and reduce debt?

Debt

Following the initiation of supply-side tax cut policy in 1981 there has been a marked and consistent increase in our national debt, in terms of both total dollars as well as when expressed as a fraction of our economy.

Every presidential term where tax cuts were the centerpiece of economic policy (Reagan 1st and 2nd, GHW Bush, GW Bush), debt increased at a pace greater than the growth of our economy.  And every presidential term  where progressive tax rate policy was in place (Carter, Clinton 1st and 2nd) experienced a reduction of debt as a fraction of our economy.

Not a single economist in the above cited Booth poll believed that cutting taxes today will lead to higher government revenue by boosting the economy.  That position is consistent with what was observed during the oft vaunted Reagan recovery (second term) when there was reasonable job creation – the national debt still increased as a percentage of our economy – those tax cuts simply did not pay for themselves.  In fact, an argument can be made that virtually all of this country’s burgeoning debt, that initiated in 1981, is directly attributable to Republican economic policy (that is still on the books through the extension of the unfunded Bush tax cuts) and the consequences of the spectacular failure of deregulation policy (ref) (ref) that was at the heart of the recent recession.

Regarding the claim that our current deficits are the result of runaway spending under president Obama (a claim made by Republican presidential candidate Romney (ref)), a recent article in MarketWatch by Rex Nutting entitled “Obama spending binge never happened” made the claim that government outlays under the Obama administration were rising at the slowest pace since the 1950’s.  Mr. Nutting’s claim was fact checked by PolitiFact and was rated Mostly True (ref).

Consider that in 2000 we had a record surplus and the ability to completely pay down our public debt within a decade (ref).  Reinstatement of unfunded tax cut policy in 2001, in conjunction with increased spending largely in defense/security, increased the deficit by $539 billion in 2005 (ref).

Table 1: Tax and Spending as a Share of the Economy: Change From 2000 to 2005
	As a Share of GDP			Share of Total Change
	2000	2005**	Change
Revenues	20.86%	16.82%	-4.04%	71%
Programs	16.13%	18.62%	2.49%	44%
Interest*	2.30%	1.45%	-0.84%	-15%
Net Effect on the Deficit	2.44%	-3.26%	-5.69%	100%
* Interest payments declined as a share of GDP, despite the increase in deficits, because of the drop in interest rates. ** Figures include the cost of continuing operations in Iraq and Afghanistan as estimated by CBO.

The deficits in 2005 were not due to runaway spending in domestic programs but rather the impact of the unfunded tax cuts and increases in defense/security spending.  This is the same direction that Mr. Romney has stated he would take (ref) (ref).

Add to that the loss of revenue from a marked increase in unemployment from the recession and stimulus spending to stave off the impact of the recession (including additional tax cuts to the middle class).  Today’s deficits are in large part due to a shortfall in revenue and steps that have been taken to rescue the economy – not outlandish spending.  And attempts to return to the policies of the 1990’s that were associated with surpluses and strong employment have met with obstructionism time and again by the Republican minority in the Senate.

So, with the unanimous opinion of 40 bipartisan and respected economists in the Booth survey, supported by data such as the above, why should we vote for a plan calling for additional tax cuts without explanation as to how we will offset the additional loss of revenue?

Other False Claims

Failed Stimulus

Ninety-two percent (92%) of the economists in the Booth survey agreed that the Obama stimulus succeeded in reducing the jobless rate.  Regarding whether the benefit of the stimulus exceeded its cost, more than half thought it did, one in three was uncertain, and less than one in six disagreed (ref).

The rise in employment during the Obama administration is closely tied to the initiation of stimulus spending 2009.

 

Obama Energy Policy Causing Increased Gasoline Prices

Newt Gingrich made the claim that president Obama wanted the price of gasoline to rise so that alternative energy solutions could be pursued – a claim that has been debunked (ref).   The economists in the Booth survey were in unanimous agreement that ‘market factors’ (such as the ‘specter’ of Iranian oil cutoffs – ref), not energy policy, have driven changes in the price of gasoline.  Yet that has not stopped the false claim from being used politically.

And regarding the push to produce more crude oil at home to lower gasoline prices, for the first time since 1949 the US exported more gasoline, heating oil and diesel fuel than it imported according the Energy Department (ref); this while the price of gasoline at the pump increased while gasoline inventories fell and crude oil inventories rose.  The most likely explanation being that the imported crude is being refined here in the US and the refined products are being exported.  A president’s administration does not control the price of a barrel of oil; it is priced in markets based on global demand. ‘ Crude at Gulf Coast refineries is priced at the Brent crude import price, no matter where it comes from’.

Getting Tough with Chinese Currency

Mr. Romney has stated that he will get tough on day one regarding Chinese currency, a position that could backfire (ref).  But Krugman makes the point that this is an issue whose time has passed (ref).  Although in 2010 an undervalued renminbi was a drag on economies such as the US, since then two things have happened: “relatively high inflation in China and some appreciation of the renminbi against the dollar.  As a result, the real exchange rate of China against the US (based on consumer prices), has appreciated significantly:”

 

 

Krugman’s conclusion is that this is an odd time to be making this an issue, “unless, of course, it’s just bluster aimed at making voters think you’re tough.”

Citizens United: An Impediment to Enacting Solutions

A recent NY Times posting by Thomas Edsall, that is the basis of this section, describes how the Republican establishment has been unexpectedly turned on its head following the 2010 Supreme Court’s Citizen’s United decision that opened the door to unlimited contributions to super PACs from corporations and unions (ref).  In 2010 outside fund raising skewed decisively to the right; in the current 2012 election it has shifted overwhelmingly to the right.

Although one may think this would favor the Republican Party, it has actually worked to the detriment of a party that historically exercised greater authority over policy and candidate selection, and the flow of money to those candidates, than did the Democratic Party.  The Republicans used to be able to “snuff out” insurgencies, “including candidates from the social right – Pat Buchanan, Pat Robertson and Gary Bauer – and candidates from the economic right like Jack Kemp and Steve Forbes”, relegating them to marginal status.

However, the Citizen’s United ruling has hit the Republican Party where it is most vulnerable – the Primaries.  Just four ‘renegade billionaires’, Sheldon Adelson, Harold Simmons, Foster Friess, and William Dore, supported two marginal candidates, Newt Gingrich and Rick Santorum, turning the primaries into an open contest, stunning traditional party power brokers and “giving full voice to the more extreme wings dominated by the Tea Party and the evangelical right”.  And the Republican National, Congressional and Senatorial, Committees are hands-off during the primaries.

Consider that Dick Lugar, a long standing GOP senator from Indiana, was ousted by Tea Party candidate Richard Mourdock who publicly stated pregnancy from rape is ‘something God intended’ (ref) and would legally force women to keep the pregnancy.  Richard Mourdock is the type of fringe candidate that the Republican Party used to be able to ‘snuff out’; but not in today’s post Citizen’s United political world.  And regarding extremist positions, consider that the 2010 influx of Tea Party candidates into the US House of Representatives actually supported a US default on its debt unless they got their way.

The establishment candidate, Mitt Romney, was forced well over to the right during the primaries, and is now in the position of having to back track on positions that would win a highly partisan and special interest-driven primary, but would not fare well with moderate voters in a general election.

The Citizens United decision has opened the door for the uber-wealthy, with extremist views or self-serving interests, to buy the primaries.  And, as Mr. Edsall concluded: “The displacement of the parties by super rich men determined to flex their financial muscles is another giant step away from democracy.”

Closing Comments

In having considered a run for federal office at one point, an experienced political consulting group relayed the importance of being able to buy TV ad space during prime time – and that is expensive.  Public opinion is swayed by repeated messaging into the living rooms of American citizens.  Say something enough times and it becomes truth.  And considering the powerful special interests that can now pump unlimited sums of money into elections, there is little doubt that public opinion is being shaped by misinformation.

Campbell and Putnam’s research (ref) showed that the important drivers for Tea Partiers, who have been shown to be a powerful force in Republican primaries, are social conservatism and a desire to incorporate religion into politics – although smaller government is the cry of their leadership, it is not a driver for them.  Consider that this crowd echoes the cry for reduced government spending yet, regarding two of the largest government spending programs, 70% of them oppose Medicare cuts (ref) and by almost 2 to 1 oppose Social Security cuts (ref).  These are the very programs that the party they support want to ‘voucherize’ and privatize.  As long as individuals are driven by bias, they become easy prey to manipulation by special interests, willing and wanting to believe what comes across the TV, and ultimately casting votes against their own financial best interests.

Thomas Jefferson stated: “I never submitted the whole system of my opinions to the creed of any party of men whatever in religion, in philosophy, in politics, or in anything else where I was capable of thinking for myself.  Such an addiction is the last degradation of a free and moral agent”.  To Francis Hopkinson, March 13, 1789

With our national debt rising to dangerous levels,we can not afford to be a nation of sheep led by what we hear in special interest-driven political ads and TV networks.  We need to have policy enacted having the best chance to stimulate the economy and spur job growth.  And with 70% of our economy based on personal consumption, those policies should include rebuilding the purchasing power of our broad, yet rapidly disappearing, middle class (ref).  This election very badly needs to be driven by facts, not blind partisanship fueled by misinformation.  Facts do matter.