GOP Study: GOP Austerity Will Raise Unemployment and Lower Wages

In an effort to stiff-arm Democratic critics of their $60 billion spending cut plan, Republicans are circulating a new paper from the Republican staff of the Joint Economic Committee to defend the case for deep and immediate spending cuts.

Just one thing. As National Journal's Jim Tankersley and Tim Fernholz find, the paper ultimately makes a decent case against cutting too much too fast:

The paper predicts that cutting the number of public employees would send highly skilled workers job hunting in the private sector, which in turn would lead to lower labor costs and increased unemployment. But "lowering labor costs" is economist-speak for lowering wages -- does the GOP want to be in the position of advocating for lower wages for voters who work in the private sector?

It's arithmetic. If you cut government spending, you cut jobs. If you cut jobs, you raise unemployment. More unemployment means lower demand for goods, and lower labor costs for employers, since jobless are often willing to work for lower wages. (Over time lower wages help return the economy to equilibrium, but in the short run they push down prices.) This is all important, but it's intuitive.

Zooming out from this debate, deficit reduction is a painful solution to insure against the possibility of a more painful crisis. There's no sugar-coating this fact. But that's exactly why the smartest solutions start early, act slowly, and cut broadly. The GOP's $60 billion plan is too early, too fast, and too narrow. If they don't believe their own research on this, who will they believe?

This article available online at:

http://www.theatlantic.com/business/archive/2011/03/gop-study-gop-austerity-will-raise-unemployment-and-lower-wages/73026/