Republicans Reject the Republican Offer on Deficit Cutting Mix, or Democrats Propose the AEI Plan on Tax Increases vs Spending Cuts

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?)

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15 Responses to Republicans Reject the Republican Offer on Deficit Cutting Mix, or Democrats Propose the AEI Plan on Tax Increases vs Spending Cuts

  1. tom says:

    Just more evidence that Republicans could care less about the deficit. They want to dismantle social programs, and being obstinate and forcing a default crisis will help them achieve that goal.

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  3. Weiwen Ng says:

    Imo, these guys think the ideal ratio is 300% spending cuts to -200% revenue raises.

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  5. D M Smith says:

    I know we’ve all heard about the conservative agenda, to ‘starve the beast’. Norquist, Kristol, et al. I don’t think enough people take seriously the possibility that thinking conservatives would be delighted with a US default. What better way to gut the national government and its hated progams, than to cripple its finances? And then enrage the middle class with AEI “studies” blaming government, Democracts, etc. The President may well be playing chicken with GOP leaders who are convinced they can’t lose, whether he swerves or not.

  6. skyjelly says:

    Ok, this is getting frightening now. Not only because Republicans are poised to destroy the economy (a win-win for them and the Republican nominee) but because the Democrats seem utterly flaccid in the face of what is arguably, treason. And aside from Obama yesterday, no one is calling them out. I’d like to think the President and Harry Reid have some super-secret strategy up their sleeves but I’m losing hope.

  7. Da says:

    This is frustrating. From a duped public willing to believe anything “liberal” or “progressive” is dumb, fey or evil to a Republican party that shamelessly and strategically plays to win at all costs to a Democratic party that shamefully and pitifully plays themselves to please the Republicans.

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  9. D M Smith says:

    Even if Mr. Obama understands what he is faced with, his position is tenuous. His conduct during and after the midterms sent a strong message of weakness, and this is his Cuban Missile Crisis. He has to defend the credibility of the “full faith and credit” of the US government, but arguably has very little to negotiate with, and certainly his inner circle seems to lack the necessary intellectual heft in areas of macro economics.

    At this stage, Mr. Obama has to decide whether there is a strategy available to him that involves shutting down the government and letting forces he can’t control scare enough members of Congress into a compromise, right up to the brink of default; or whether the cause is lost, the Tea Party calls the tune, and the Administration can only try to save face.

    I think King Solomon would have cut the baby in half. More importantly, everyone believed he would have. So, Mr. President, call in the experts and instruct them to draft plans to start shutting the government down and stave off actual default as long as possible. Don’t let Harry Reid or Nancy Pelosi catch a hint you don’t mean it. You do.

    Or, cut a deal now and save the country the embarrassment of you conspicuously trying to save face later.

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  14. Jay Thomas says:

    When nobody buys our worthless bonds next year, I hope all of you wake the hell up

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