Like Brad Delong, David Dayen and others, I think it is crazy that we are even talking about cutting the deficit with unemployment so high and inflation and borrowing costs so low. Even controlling for that, there’s something about that Wonkbook post explaining where the discussions over cutting the deficit broke down that stuck with me. Here it is again, my bold:
A bit more information has trickled out over the last few days detailing the exact state of the budget negotiations when they collapsed. Both sides, as they often said, were shooting for about $2.4 trillion in deficit reduction over 10 years. They’d already agreed on around $1 trillion in spending cuts and were making good progress on the rest of it. But Democrats insisted that $400 billion — so, 17 percent — of the package be tax increases. And that’s when Republicans walked.
So the Democrats are proposing 17% tax increases, 83% spending cuts, and the Republicans are rejecting it. Well, this just forces us to ask: What’s the ideal conservative Republican ratio here?
Let’s take a look at March, 2011 Joint Economic Committee (JEC) Republican report, Spend Less, Owe Less, Grow the Economy. This report lays out the entire case for expansionary austerity, or how if we cut the deficit now the economy will likely grow faster, faster enough to offset the contraction. National Journal covered this report here. I think this report is bananas, but we are trying to think like a right-wing economist here. That report is based on an study by the right-wing think tank American Enterprise Institute, carried out by Biggs, Hassett, and Jensen, titled A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked (which, in turn, is largely based on a 2009 study by Alberto Alesina and Silvia Ardagna of Harvard, titled Large changes in ﬁscal policy: taxes versus spending).
When Republicans say that there is all kinds of research supporting their demands to cut the deficit for the health of the economy, they are specifically referring to their JEC report, which summarizes all the studies and lays out their arguments for What Is To Be Done. So what does it say about the ratio? Republican JEC, my bold:
Biggs, Hassett, and Jensen [of the American Enterprise Institute] (2010) found strong evidence that government spending reductions outweigh revenue increases in successful consolidations regardless of the methodology used to identify consolidations. They found that across both methods for identifying consolidations—Alesina’s cyclically adjusted primary balance method (excludes interest payments and business cycle effects) and the IMF’s action-based method (spending cuts and tax increases explicitly for deficit or debt reduction)—successful fiscal consolidations averaged 85% spending cuts and 15% revenue increases, while unsuccessful fiscal consolidations averaged 47% spending cuts and 53% revenue increases [fig. 5].
So if you opened the Republican economic study that their whole argument is based on, you would find that they recommend 15% tax increases, 85% spending cuts. There’s even a chart! Remember, the Democrats are proposing…..17% tax increases, 83% spending cuts, and getting rejected.
Just in case the JEC messed something up, I re-checked the Biggs, Hassett and Jensen AEI report and found this chart summarizing the literature along with this quote (my bold):
The goal of this exercise is to address the budget shortfall evolving over the next several decades through steps that consist of approximately 85 percent reductions in expenditures and 15 percent increases in revenues, percentages that are consistent with historically successful fiscal consolidations. [p. 14]
I think the problems with those studies are well documented – among many other things, they study countries cutting at full employment and are offsetting contractions with monetary policy and trade, things not relevant for the United States – and we can see the test case of this failing in England (and everywhere else).
But let’s assume we completely believe this right-wing economic philosophy for the purposes of this post. What would we propose as right-wing economists? Checking out their reports proposing this move, we’d proposed 85% spending cuts, 15% tax increases, exactly what the Democrats are proposing.
So once again, just like in the government shutdown debate, Obama and the Democrats are fighting to get what the Republicans and the right-wing economic think tanks originally proposed they should do, and the GOP just keeps walking the goalposts to the right. If this comes down to the constitutional option, I hope everyone remembers that the Democrats have actually proposed doing exactly what the Republicans and the right-wing economists originally asked for.
(FYI 1: There must be something broken on the AEI webpage – the posts where they congratulate the Democrats for doing what their economists originally proposed haven’t shown up yet. FYI 2: Democrats, you know there are, like, liberal economic think tanks you can call, right?)