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

Earlier this month, House Republicans laid out a perverse plan to lower working Americans' wages, supposedly in a bid to get employers to hire more of them (PDF). One would be hard-pressed to find a better example of the “race to the bottom.”

Republican staffers on the Joint Economic Committee released the study in response to widespread criticism that the deep public sector cuts they've advocated threaten to derail an already anemic “recovery” -- economist Mark Zandi estimated last month that if enacted, the spending cuts would cost the U.S. economy 700,000 jobs through 2012.

So, as Tim Fernholz and Jim Tankersley wrote in the National Journal, the GOP report “makes the party’s ... case that fiscal consolidation (read: spending cuts) can spur immediate economic growth and reduce unemployment.”

The paper calls for cuts that are “large, credible, and politically difficult to reverse once made,” and offers a typical conservative fantasy about shuttering entire federal agencies. But topping the list of what should be on the Republicans' chopping block is “decreasing the number and compensation of government workers,” which the staffers say will spur job creation because “a smaller government workforce increases the available supply of educated, skilled workers for private firms, thus lowering labor costs.”

“Labor costs,” of course mean “wages” – Americans' paychecks. So, a central plank in the GOP's economic recovery plan is to flood the market with yet more unemployed people in order to drive wages (which have stagnated for an extended period) further down.

That's part and parcel with a larger assault on the middle class. Cutting public employees also means laying off workers in a sector with a 38 percent unionization rate, and forcing them to compete against those toiling in corporate America with its 7 percent union density -- last year, more working people belonged to a union in the public sector (7.9 million) than in the private (7.4 million), despite the fact that corporate America employs five times the number of wage-earners.

With state and local budgets hit hard by the economic crash, and the right painting public sector workers as the 21st century-version of Ronald Reagan's mythic welfare queens, this process is already underway. Last year, Fed Reserve Chairmen Ben Bernanke estimated that the public sector had laid off a quarter million workers since 2007. According to a Labor Department report, state and local governments beat every other sector in terms of the number of workers laid off last summer. 30,000 were laid off last month alone, and, as the conservative noted, “the troubles at the state and local levels promise to be a fixture for some time to come.”

The GOP's paper is based on some remarkable voodoo economics. As Fernholz and Tankersley note, their response to critics “is that 'non-Keynesian' effects — increased business and consumer confidence that their taxes won’t rise as a result of government retrenchment—will provide immediate positive results across the economy.” This is based the popular and wholly false conservative meme that “uncertainty” about future taxes and regulations is keeping employers from hiring.

Numerous surveys have found that it is a lack of customers, and not “uncertainty” about future taxes that is leading employers not to hire. It's entirely consistent with a huge drop in demand in our consumer-driven economy following the housing market crash. As economist Dean Baker wrote last month, the recession “reduced consumption through what is known as the “housing wealth effect.”

The housing wealth effect is estimated at five to seven cents on the dollar, meaning that homeowners will on average increase their annual consumption by between five and seven cents for every additional dollar of housing they own. This means that the $8 trillion of housing-bubble wealth implied an increase in annual consumption of between $400 and $560 billion. Now that most of the bubble wealth is lost, so is this consumption.

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.”


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