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Republican attitudes and the current fiscal debate

January 15, 2013

Republican politicians and the voters who support them like to paint themselves as “fiscally responsible” and those that disagree with them as deliberate moochers, opponents of a market economy, or naïve citizens who want all the benefits of government spending, but simply cannot understand the cost of these programs. The truth is, not surprisingly, that it there are those of us who disagree with the Republican stance on taxes and spending, but are not “takers”, socialists, or idealistic morons. In fact, some of us learned our economics from the same textbooks and agree broadly with the Republican goal of controlling the size of government, preventing taxes from becoming overly burdensome, and controlling deficit spending, but somehow in the end find ourselves reluctant to endorse the Paul Ryan budget or some other manifestation of Republican fiscal goals. To understand how we end up agreeing with some broad Republican fiscal ideals, but arguing against the policies Republicans are campaigning for in today’s heated fiscal debate, it is first necessary to review the evolution of Republican fiscal policy and then examine their current stance.

Ever since the end of the second Bush administration the Republican party has shifted from a party of faux deficit hawks to serious tax hawks. Before Reagan, Republicans were often concerned first with the size of the deficit and second with how to reduce it. In other words, Republicans were willing to tolerate some tax increases in the name of reducing the deficit because that was priority number one for some of them. In the 1980’s things began to change. Republicans started publicly stating that government spending should be kept as small as reasonably possible and as a corollary taxes could and would also be reduced. With hindsight we can see that Republican priorities were actually 1) low taxes, 2) high defense spending and 3) low non-defense spending. The third priority also paled in comparison to first two. This meant Republicans often pushed for tax cuts that were not offset by reduced spending, always supported a high-level of defense spending, never pushed too hard for politically unpopular spending cuts, and even on occasion supported increased non-defense spending that was not paid for (think Medicare Part D). In other words, while those three priorities should have still amounted to a low deficit, in reality what it amounted to was a policy of low taxes and high defense spending.

After Obama’s election Republicans adjusted their priorities so that the budget deficit was again of prime importance, but they also dug in their heels on their old priorities of low taxes, high defense spending, and low non-defense spending. In other words, the Republicans would now like to achieve a balanced budget without increasing tax revenue or reducing defense spending.

Speaking in generalities, reduced public sector spending is preferable because the private sector is more efficient and innovative due to the constant pressure of market forces. A low tax burden increases the rewards of success in the private sector. High defense spending is more controversial, but many people believe in the safety it creates and further enjoy the independence and leverage a strong military can give a country. That’s all fine.

The trouble with the new Republican priorities starts when we move away from generalities and consider some specifics, such as:

Timing. As noted above, many Americans may support reduced government spending as a share of GDP, but they may not support that reduced spending right now. According to the initial estimate from The Bureau of Labor Statistics the unemployment rate at the end of 2012 was 7.8%. According to The Economist’s monthly survey, the US economy is estimated to have grown at roughly 2.2% in 2012 and is forecast to grow by 2.0% in 2013 – hardly the kind of accelerated growth that will rapidly reduce unemployment. Delaying any kind of fiscal consolidation would have two benefits: first, some government spending would be automatically reduced as less individuals drew on unemployment benefits, food stamps, and other government assistance programs. Meanwhile, tax receipts would also increase as more people found work and earned higher wages. Second, we would not be cutting government’s share of total output at a time when the multiplier effect from government spending cuts would be at its highest. There are times when fiscal consolidation has a minimal impact on economic growth, and might even add to it, but right now it would probably contribute to our short-term challenges. Indeed, the International Monetary Fund recently had to admit they had underestimated the negative impacts that fiscal consolidation can have when it is implemented at the wrong time.

Which spending. According to the Center on Budget and Policy Priorities, in 2011 21% of the federal budget went to Medicare, Medicaid, and CHIP, 20% to defense, 20% to social security, 13% to safety net programs, 7% to federal retirees and veterans, 6% to interest payments, and the balance (12%) went to transportation, education, research, and a host of other smaller items. If you’re a Republican and you want to cut non-defense spending, which spending do you cut? I support a government where spending is restrained during times of low unemployment, but I do not support cutting spending for those who need the most help in our society. Meanwhile, the American defense budget dwarfs that of any other potential rival. According to the Peter G. Peterson Foundation in 2011 the US spent more than the next 13 countries combined on defense. To me, that sounds like the US defense budget could be reduced significantly without putting US citizens in danger. Instead, that is the one area of spending that Republicans have said is off limits. Reduced defense spending might also have the added benefit of finally forcing some American allies to increase defense spending and help share the burden of providing for a safe and stable world, instead of free-riding off of America’s military.

Fairness. This issue is a bit fuzzy and hard to define, but let me try to explain. The vast majority of Americans, including myself, agree a market based economy is best way to increase the prosperity of society. In a market based economy some people will do quite well and amass huge fortunes, others will get along OK, and some will outright struggle. That is one of the implicit things about markets: they produce winners and losers. When people talk about this they tend to focus on how the process of creative destruction allows the best possible products and ideas to thrive, but we never talk about what happened to the loser in the market place. The loser loses his job or has to close her business or struggles to earn more than a measly income. The thing is though, those that struggle in the market place are absolutely a necessary part of the market place – we cannot have winners without some losers. If we believe in a system that rewards the most talented or luckiest individuals then we should at least provide some kind of care for the least talented or unluckiest individuals because otherwise they don’t benefit from the system. What good does it do me to live in a society where I am not smart, energetic, or lucky enough to compete if I see none of the benefits from the success of my fellow citizens? If the argument for a market based system is a utilitarian one – it’s not the “fairest” system, but it produces the greatest good for the greatest number – then shouldn’t we work to ensure the everyone benefits to some degree?

Getting back to my primary point then: we might agree that, all else being equal, reduced deficits are better than enlarged deficits, that less government is better than too much government, and that low taxes are preferable to high taxes, but we do not all agree on when or how to pursue these objectives. From the constraints I have noted above you can probably tell that I do not support a concerted effort to reduce the deficit right now (through either higher taxes or reduced spending) because I actually believe a larger deficit is preferable under current conditions. Furthermore, when it comes time to reduce the deficit (i.e. when unemployment is much lower), I do not believe a massive defense budget and low tax burden needs to be protected at the expense of those who benefit the most from government assistance, even if I agree with the overall aim of keeping government to as small a share of GDP as reasonably possible.

It is not fair to say that either you support Republican fiscal priorities or you are a fiscally irresponsible mooch who only wants the benefits of government without having to pay for them. Many of us disagree with GOP fiscal goals and yet still broadly agree with the economic philosophy the underlies their goals, but we disagree in how we see this playing out.


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