Prosperity through lower wages?

at 05:52 PM ET, 03/25/2011


(Charles Dharapak - AP)
Tim Fernholz and Jim Tankersley took the time to read a report that Speaker John Boehner’s office distributed as evidence that sharp deficit reduction can lead to rapid economic expansion. The plan, it seems, is to create a bunch of unemployed public workers who’ll create more competition for the few open jobs in the private sector and thus drive wages down for everybody:

The paper predicts that cutting the number of public employees would send highly skilled workers job hunting in the private sector, which in turn would lead to lower labor costs and increased employment. But “lowering labor costs” is economist-speak for lowering wages — does the GOP want to be in the position of advocating for lower wages for voters who work in the private sector?

The report also touts the value of cutting “transfer payments,” or subsidies, to private firms, suggesting cuts to Amtrak and ethanol support. But many Republicans back both of those objectives, and the GOP has long been a staunch defender of corporate subsidies through both spending and the tax code, including direct payments to agricultural firms.

This goes back to my point that the worst thing for an unemployed person is another unemployed person.But to give the GOP’s report a bit more credit, its argument is that in the mid-1990s, a number of small, European nations (and Canada) sharply cut government spending and saw rapid economic growth afterwards. The problem, as the International Monetary Fund details in this review (pdf) of the austerity measures attempted by developed nations, is that these countries understood that cutting government spending would kill demand, and so they compensated with policies that would keep demand strong. Those policies were 1) really aggressive efforts on the part of the central bank, 2) devaluing their currencies, and 3) living in the mid-1990s, when the global economy had one of its best-ever decades. Republicans oppose policies that would lead to #1 and #2, and 2011 is a very different moment, in terms of global demand, than 1994.

That said, the IMF report does say two things that back up conservative preferences: 1) cutting deficits by cutting spending does appear to be better for the economy than cutting deficits by raising taxes, so it’s not crazy to want to see spending cuts predominate over tax increases, and 2) over the long-term, cutting deficits does help the economy. Unfortunately, over the short-term they do real harm: “A fiscal consolidation equal to 1 percent of GDP typically reduces GDP by about 0.5 percent within two years and raises the unemployment rate by about 0.3 percentage point.” If you were to take this evidence seriously, you’d wait a few years to start cutting deficits, but when you did it, you’d prefer spending cuts to tax increases. Though one caveat worth noting is that the countries in this report have higher taxes and more government spending than we do, and so it’s possible that raising taxes there does more damage than raising taxes here, as taxes are already high over there, while cutting spending here would do more damage than cutting spending there, as spending is lower here.

 
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