Economists Agree with GOP Leaders: Spending Must Slow
Last Wednesday, a delegation of House Republicans presented President Obama with a plan they said would create jobs at no cost to the taxpayer.
The Republicans’ ‘no-cost jobs creation plan’ called for:
• The halting of any proposed rule expected to have an economic cost
• Freezing domestic discretionary spending at last year’s level
• Assistance to community banks and small businesses
• The removal of regulatory barriers to energy production
• The immediate implementation of three free trade agreements pending before Congress
Describing the meeting to reporters later, Republican Whip Eric Cantor said President Obama “challenged us to bring in economists to make the case that we ought not be spending right now.”
The House Republicans have not as yet answered the president’s invitation. So we at FrumForum approached four economists with impeccable GOP credentials to ask their views. The result a 3-1 decision in favor of the GOP plan.
Kevin Hassett, Director of Economic Policy Studies at the American Enterprise Institute, called the Republican plan “solid”, commenting that:
The call to reduce spending is consistent with a recent EU study that found that ‘fiscal consolidations’ can be stimulative... Uncertainty about Obama’s policy has clearly been high, and that is a big negative as well. All told, this plan is clearly superior to the President’s economically illiterate call for more Green Jobs... Indeed, Obama might not like the academic literature if he held his plan to it. The literature has found that green jobs cost about 2 real jobs for each green job created.
Allan Meltzer, one of the world’s foremost experts on monetary policy and a professor of Political Economy at Carnegie Mellon University, said that the plan’s biggest advantage was that it addressed the uncertainty behind pending big government legislation:
Pervasive uncertainty is a current reason why firms delay investment and expansion. Businesses cannot know the size of future tax rates to pay for healthcare, the environment, the massive budget deficit and the unsustainable rise in government debt. Increased regulation of business activity, increasing antitrust activity, announcement of plans to ease restrictions on labor unions, and uncertainty about the actions of the Environmental Protection Agency add to the uncertainty. Anti-business rhetoric from President Obama is another reason for caution. The Republican job proposal directs attention to several of these current and potential sources of uncertainty, higher costs of production, and higher taxes. Employment and output would increase if the administration and Congress reduced current uncertainty.
Douglas Holtz-Eakin, a former director of the Congressional Budget Office and domestic policy director of the 2008 John McCain presidential campaign, agreed with Meltzer’s assessment:
The President needs to see the entire range of academic opinion, not just the Keynesian advocates. There is an enormous literature documenting the failures of past efforts at fiscal fine-tuning, the importance of automatic (not discretionary) stabilizers, and the role of expectations of future policy on growth.
(Holtz-Eakin did dissent from the House Republicans’ proposal to assist community banks).
However, John Makin, an AEI economist and consultant to private industry, disapproved of the Republican plan.
The Republican proposal underwhelms me... the selective measure to help commercial real estate is unadvisable considering that overinvestment in real estate is one of the reasons we had a bubble in the first place.
The Republicans need to be proactive: propose payroll tax relief, which reduces tax relief and creates incentives for more hiring.
Maybe next time House Republicans go speak with the president, they should bring their economists along with them – so that he can hear the rebuttal to his program directly and without delay.