From The New York Times -- August 12, 2011:
G.O.P. on Defensive as Analysts Question Party’s Fiscal Policy
By JACKIE CALMES
WASHINGTON — The boasts of Congressional Republicans about their cost-cutting victories are ringing hollow to some well-known economists, financial analysts and corporate leaders, including some Republicans, who are expressing increasing alarm over Washington’s new austerity and antitax orthodoxy.
Their critiques have grown sharper since last week, when President Obama signed his deficit reduction deal with Republicans and, a few days later, when Standard & Poor’s downgraded the credit rating of the United States.
But even before that, macroeconomists and private sector forecasters were warning that the direction in which the new House Republican majority had pushed the White House and Congress this year — for immediate spending cuts, no further stimulus measures and no tax increases, ever — was wrong for addressing the nation’s two main ills, a weak economy now and projections of unsustainably high federal debt in coming years.
Instead, these critics say, Washington should be focusing on stimulating the economy in the near term to induce people to spend money and create jobs, while settling on a long-term plan for spending cuts and tax increases to take effect only after the economy recovers.
But Republicans in Congress and on the presidential campaign trail refuse to back down.
Economists disagree about the proper balance between spending cuts and tax increases in reducing a government’s debts. Some studies by both liberal and conservative economists suggest that emphasizing spending cuts is better for long-term growth. But there are few if any precedents for paying down such a large debt solely through spending cuts.
Among those calling for a mix of cuts and revenue are onetime standard-bearers of Republican economic philosophy like Martin Feldstein, an adviser to President Ronald Reagan, and Henry M. Paulson Jr., Treasury secretary to President George W. Bush, underscoring the deepening divide between party establishment figures and the Tea Party-inspired Republicans in Congress and running for the White House.
“I think the U.S. has every chance of having a good year next year, but the politicians are doing their damnedest to prevent it from happening — the Republicans are — and the Democrats to my eternal bafflement have not stood their ground,” Ian C. Shepherdson, chief United States economist for High Frequency Economics, a research firm, said in an interview.
As for the longer term, Ethan Harris, co-head of global economics research at Bank of America, wrote this week that “Given the scale of the debt problem, a credible plan requires both revenue enhancement measures and entitlement reform. Washington’s recent debt deal did not include either.”
That is a common assessment, which may explain why Representative Eric Cantor, the House majority leader, was defensive about Republicans’ antitax absolutism in a memo to his colleagues on Monday.
“Over the next several months, there will be tremendous pressure on Congress to prove that S.& P.’s analysis of the inability of the political parties to bridge our differences is wrong. In short, there will be pressure to compromise on tax increases,” Mr. Cantor wrote.
But, he added, “We were not elected to raise taxes or take more money out of the pockets of hardworking families and business people.”
Republican candidates share that fervor: in their Iowa debate Thursday night, all eight participants raised their hands when asked who would reject a long-term debt reduction package that had $10 in spending cuts for every $1 in revenue increases.
Although many forecasters criticize S.& P. for downgrading the United States, they share the company’s disappointment that the budget deal fell short of the “grand bargain” Mr. Obama tried to negotiate with House Speaker John A. Boehner to provide stimulus and cut annual deficits up to $4 trillion over 10 years.
Along with annual caps on discretionary spending for domestic and military programs that ended up in the final deal, Mr. Obama and Mr. Boehner were also exploring short-term stimulus measures and, for the long term, revenue increases and future savings from Social Security and from the Medicare and Medicaid programs, whose growing costs are stoking projections of mounting debt. But Mr. Boehner quit the talks over taxes. And until Republicans budge on revenue, Democrats refuse to consider entitlement cuts.
Of course, Republicans can point to support among some conservative economists. John B. Taylor, a professor at Stanford and an adviser to Republican presidents and presidential candidates, said in an interview that temporary stimulus measures were counterproductive, and for long-term debt reduction, “I would try very hard to make it work without revenues.”
But Mr. Feldstein, who was chairman of President Reagan’s Council of Economic Advisers, was among the first in 2008 to call for stimulus spending and recently has advocated raising revenue. He would do so by limiting “tax expenditures,” the costly tax breaks for corporations and individuals that include the mortgage-interest deduction — an idea recommended in December by a majority of Mr. Obama’s fiscal commission and lately by the president.
“I think Republicans should recognize that is a way of raising revenue without hurting incentives by higher marginal tax rates,” Mr. Feldstein said.
S.& P. based its downgrade and its negative outlook for America’s credit rating partly on the assumption that Bush-era tax cuts for high incomes would be extended past their 2012 expiration, “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.” S.& P. said it could change its outlook to stable if the tax cuts ended.
Yet Republicans insist that taxes will not be on the table for the bipartisan Congressional committee created by the deficit deal. The panel must propose additional savings by Nov. 23 to fulfill the deal’s promise of up to $2.4 trillion in savings over 10 years.
Assuming Democrats then refuse to consider entitlement savings, only discretionary spending would be left — less than 40 percent of the budget, encompassing education, research, military, infrastructure and more. Last winter House Republicans forced Mr. Obama to agree to cut such spending by $183 billion over a decade. The deficit deal would cut nearly $1 trillion more.
The prospect of further reductions worries forecasters. Jerry Webman, chief economist of Oppenheimer Funds, wrote in an analysis that while the cuts were not huge this year or next, “they are nonetheless contrary to what would be expected in a fragile economic environment.”
In separate interviews, Joel Prakken, chairman of Macroeconomic Advisers, a forecasting firm, and Laurence H. Meyer, its co-founder and a former Federal Reserve governor, called the reductions “job-killing spending cuts” — playing on Republicans’ mantra against “job-killing tax increases.”
Mr. Prakken said tighter spending would “slow economic growth unless it was offset with lower interest rates through the Fed.” But with interest rates already near zero, the best the Fed could do this week was signal that rates would remain ultra-low well into 2013.
Low borrowing costs, analysts say, are more reason to bolster the economy now.
“At the very least,” said Mark Zandi, chief economist of Moody’s Analytics, Congress should renew for another year two measures that expire after 2011 — payroll tax relief for employees and extended unemployment compensation — as Mr. Obama has proposed. If either expired, Mr. Zandi said, that could shave roughly a half-percentage point from economic growth next year.
Republicans are resistant. And Democrats are too cowed to counter much, given polls that show many Americans believe Mr. Obama’s 2009-10 stimulus package did not work, despite studies to the contrary.
A Democratic Congressional adviser, granted anonymity to discuss party deliberations, said: “We’re at a loss to figure out a way to articulate the argument in a way that doesn’t get us pegged as tax-and-spenders.”
In a column in The Washington Post on Friday, Bill Gross, who runs the giant bond-trading firm Pimco, lashed out at Republicans and “co-opted Democrats” for setting aside widely accepted economic theory.
“An anti-Keynesian, budget-balancing immediacy imparts a constrictive noose around whatever demand remains alive and kicking,” he wrote. “Washington hassles over debt ceilings instead of job creation in the mistaken belief that a balanced budget will produce a balanced economy. It will not.”