March 7, 2021

Economic Memo: G.O.P. on Defensive as Analysts Question Party’s Fiscal Policy

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 subsequently 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 the wrong one 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 simultaneously settling on a long-term plan for paying down federal debts.

There is broad disagreement among economists 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 revenues 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 presidential 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 the 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 stimulus measures for the short run and, for the long term, revenue increases and future savings from Social Security and from the Medicare and Medicaid entitlement 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 Republicans 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.”

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