Jonathan Chait

The Republican Theory of Our Current Economic Woes

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[Guest post by Matthew Zeitlin]

According to both Republican politicians and conservative opinion-writers, the problem with our economy is not a shortfall of demand. If they thought this was the problem, you would not see the calls for massive reductions in spending right now, you would not see Paul Ryan describing a payroll tax holiday as a “sugar high,” and you would not see Fred Barnes totally dismissing stimulus as a way to grow the economy.

Problem being, as Jon has pointed out before, everyone from Ben Bernanke to Goldman Sachs thinks that large, immediate cuts would retard growth. Even all the conservative folks on the Bipartisan Policy Center debt reduction task force signed on to a plan that includes a one year payroll tax holiday. And now, the Wall Street Journal has a story, the lede of which is, “The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey.” The Journal notes, “31 [of the surveyed economists] cited lack of demand (65%) and 14 (27%) cited uncertainty about government policy.”

It’s not just economists, either, who are largely concerned with demand: In a survey conducted in June by the National Federation of Independent Business, the plurality response from small businesses about their “biggest problem” was “poor sales,” which beat out both taxes and “government regulations and red tape.” The Journal points out that this percentage is “above highs seen in the recessions of the 1990s and early 2000s.”

Of course, it’s possible that Fred Barnes and Paul Ryan are right and everyone else is wrongbut, well, that’s highly unlikely. And the problem stemming from the Republican insistence that demand doesn’t matter is that it makes their opposition to eliminating tax expenditures in order to reduce the deficit hard to understand. As Ramesh Ponnuru points out, tax expenditures have nothing to do with marginal tax rates; reducing spending in the tax code would not have a supply-side effect. There is, however, the possibility that getting rid of tax expenditures “would reduce disposable income, therefore aggregate demand, and therefore the size of the economy.” But Republicans have made it clear that they don’t think aggregate demand is a problem. In other words, Republicans have an analysis of what is wrong with the economy, but, when it comes to protecting inefficiency in the tax code, that analysis is implicitly abandoned.

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