The GOP's Absurd Plan for the Economy: Lowering YOUR Wages

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The total reduction in annual demand as a result of the collapse of the bubbles in residential and non-residential real estate is close to $1.2 trillion, or 8 percent of GDP. There is nothing in the economist’s bag of tricks that easily replaces such a large loss in demand.

With consumer demand recovering very gradually – it was up 0.3 percent when adjusted for inflation in February, but much of that was simply a matter of households spending more for fuel – putting downward pressure on wages and sending more people to the unemployment line is about the worst thing lawmakers could do.

But the Republican staffers insist their plan is grounded firmly in empirical evidence. And they insist the evidence shows not only that the deficit must be reduced, but also that it has to be done through spending cuts rather than tax hikes (last year, the federal government collected the lowest share of the economy in tax revenues since 1950). “A growing body of empirical studies,” wrote the staffers, “proves that fiscal consolidation programs based predominantly or entirely on government spending reductions are far more likely to be successful” at stabilizing deficits than hiking taxes.

But the “evidence” they cite is dubious at best. Economist James Galbraith told Fernholz and Tankersley, “Much of this study relies on the growth performance of a few (very) small open economies — Sweden, Canada, New Zealand, notably — after 1994.” He added, “it’s easy to look good if you are a small country with a freshly devalued currency selling into a world boom. The ‘lessons’ will not apply to the United States, which cannot just contract domestically, devalue the dollar (sacrificing our reserve-currency position) and expect the rest of the world to bail us out by buying our exports.”Economists at the International Monetary Fund say that many of the studies cited in the Republican staffers' report are flawed. The IMF warned last year that cutting spending “typically reduces output and raises unemployment in the short term.”

Chad Stone, chief economist for the non-partisan Center for Budget and Policy priorities, added that “one of the key deficit-reduction measures in the 1990s was raising taxes on top earners, over Republican warnings that that would wreck the economy. The JEC Republican report’s claim that spending cuts are the only way to reduce the deficit and that tax increases 'are the bane of economic growth' is deja voodoo all over again.”