international analysis and commentary

The economics of the GOP

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A string of economic data published over the last few weeks, from unemployment numbers to the declining stock market, portray a US economy that is once again struggling, after what had appeared to be a few months of steady, if feeble, recovery. Slated to dominate next year’s presidential campaign, the enduring economic crisis has become a politically charged issue. The White House and Republicans on Capitol Hill are pitted against each other in a deadlock over fiscal policy, battling over tax cuts versus public spending. The urgent need to find an agreement on the debt ceiling, or risk defaulting on the country’s obligations, has spurred only limited bipartisanship, although a few hopeful signs have recently emerged. More often than not, this confrontation seems driven by electoral considerations. In the endless back and forth of Washington, what is lacking is a bold agenda for job creation that, in the longer term, can also help close the budget deficit.

Such a deeply divided political landscape, where compromise is hard to come by, is increasingly frustrating voters, who feel that they are left to weather the crisis on their own while the country’s political leadership bickers.

According to the Department of Labor’s latest monthly report on the job market, only 54,000 new jobs were created in May, down from 232,000 in April, the lowest figure in eight months. Unemployment crept up again to an unsavory 9.1%, with 13.9 million Americans out of work. US stocks have been falling steadily from a peak in April, on concerns of a potential default by Greece and a slowing of the American recovery. The housing market remains stagnant across much of the country. And both Standard & Poor’s and Moody’s, two of the world’s largest credit rating agencies, recently threatened to downgrade the US’ triple-A score in the future unless Congress acts promptly on the federal debt.

Against this backdrop, Republicans, who officially inaugurated the GOP primary election season with a televised debate from New Hampshire, are busy pandering to their most conservative base of voters, trying to outflank each other on issues ranging from deregulation to tax cuts.

Minnesota Congresswoman Michele Bachmann suggested during the New Hampshire debate that the best way to kick-start the economy would be to abolish the Environmental Protection Agency (EPA), which she dubbed “the job-killing organization of America.” During a recent speech at the University of Chicago, Tim Pawlenty, former governor of Minnesota and another candidate for the GOP nomination, offered his own economic plan. He proposed slashing taxes, bringing them below the already low levels set by the Bush-era cuts, to achieve a 5% growth rate over ten years, a figure that almost no economist finds plausible given the current state of the economy (2-3% growth is deemed more likely).

The most serious attempt at a budget proposal from a Republican leader so far has come from Paul Ryan, the chairman of the House Budget Committee. His plan would use almost all the savings obtained by gutting Medicare, which would be all but privatized, to pass more tax cuts on the highest earners, in the name of supply-side, trickle-down economics.

Given that a still-weak economy in November 2012 would play in the GOP’s favor, potentially costing President Barack Obama the White House, one wonders where the interests of the Republicans lie and whether incentives even exist for them to cooperate with the administration to spur an earlier recovery.

As for President Obama, who began his term in 2009 with a series of ambitious, and at least partially successful moves, from the $800 billion stimulus package to the bailout of the automotive industry to health care reform (which not only makes health care affordable for all Americans but also reins in some of the costs of an increasingly expensive Medicare), enduring economic challenges appear to have turned him into a tentative and uninspiring leader.

The steadfast opposition of the GOP to any policies that smack even remotely as a new stimulus is partially to blame. The results of the 2010-midterm elections, which several people in the White House interpreted as a sign that voters want more moderation, are also responsible.

Lacking a vision for the future and bogged down by enduring economic woes, the Obama election team is already at work to find a slogan for next year’s elections. Knowing full well that unemployment is unlikely to drop to levels that voters will find satisfactory, and therefore expecting a difficult economic backdrop to the campaign, they have reportedly set aside new versions of Ronald Reagan’s 1984 “It’s morning in America”, in favor of something along the less stirring lines of “Don’t change horse in midstream”. This timid approach is allowing Congressional Republicans to control the narrative, focusing on deficit reduction instead of job creation, which is really what Americans care about.

To make things worse, a number of economic advisors to the President, those more keen to rely on government intervention to boost employment, have left the White House in recent months, for example Christina Romer, former chair of the White House Council of Economic Advisers, and Austan Goolsbee, who had replaced her. Treasury Secretary Timothy Geithner, a deficit-hawk within the administration, is more than ever in control of economic policy.

Faced with a gridlocked political landscape, Americans show increasing signs of pessimism about the country’s future. In a recent CNN/Opinion Research poll, nearly half of all respondents (48%) said they believed a new “great recession” is coming.

A few hopeful signs have come recently in the context of the battle on the debt ceiling (the US government recently hit the current $14.3 trillion ceiling, and needs the authorization of Congress to raise it in order to avoid defaulting on its obligations). Led by Republican opposition to any form of government spending, Congress has refused to increase the debt ceiling unless accompanying measures to trim the budget are also approved. Negotiations have been slow, but a bipartisan group of senators, led by Vice President Joe Biden, is reportedly making headway. Biden promised that the group would have an agreement on over $1 trillion in cuts ready by the Fourth of July.

While Democrats are agreeing to larger spending cuts, a growing number of Republican senators, albeit still a minority, appear willing to challenge the GOP anti-tax orthodoxy in order to raise government revenue. Senator Tom Coburn of Oklahoma, among the most conservative in the chamber, leads the pack. He has been pressing fellow Republicans to consider some kind of tax increase if they are serious about fixing the deficit. Recently, Coburn sponsored a bill that would have eliminated billions of dollars in tax subsidies for ethanol fuel. The measure did not win the sixty votes required to beat the threat of a filibuster (many Democrats voted against it), but 34 Republicans voted with Coburn to “raise taxes” (a similar Democratic-sponsored bill cleared the Senate the day after).

In any case, even in the best-case scenario, if a bipartisan agreement is reached, it will be on ways to reduce the deficit, not on a shared agenda of job creation that can help expand the American economy. Recently, German Chancellor Angela Merkel pledged to close all of Germany’s nuclear power plants by 2022, turning the country into a lab for alternative energy sources. The White House, with the support of Congress, could push for similar audacious ideas in areas ranging from the environment to the country’s decaying infrastructure, which according to the World Economic Forum ranks 23rd in the world (it was number six only ten years ago). But no such vision exists in the United States today, because of a mix of Republican anti-government doctrine and the Democrats’ electoral fears. In this sense, more than emerging China or India, the US is its own worse enemy right now.