The Republican strategy would work if we were a small Scandinavian country in the mid-1990s exporting to a booming global economy. But we're not small, it's not 1994, and the world's not so booming.
If there's a four word slogan that sums up the GOP's economic philosophy today, it's Cut Spending, Create Jobs. You've heard it from House Whip Eric Cantor ("Less government spending means more private sector jobs -- period"), Rep. Mike Coffman ("Create jobs, cut spending"), Speaker John Boehner ("Creating jobs starts with cutting spending") and practically every other Republican with access to a microphone.
Republicans claim this isn't empty rhetoric. They point to a report from the Joint Economic Committee that found 20 examples of developed countries who cut spending and grew in the last 20 years, including Canada, Sweden, Ireland and New Zealand.
But this report represents muddled thinking for at least two reasons. First, the JEC report did not say that cutting spending would lead to job growth in the U.S. It said that there are some cases where short term factors unrelated to spending -- like lower interest rates, a depreciated currency, and higher exports -- overwhelmed the effect of the budget cuts.
Second, the experience of Canada, Sweden, Ireland and New Zealand highlight the absurdity of the argument that cutting spending should promote job growth here. Canada grew by devaluing its currency and counting on export growth to the U.S. in the 1990s. Ireland grew by devaluing its currency and counting on export growth in the 1990s. Sweden grew by expanding exports, too. New Zealand grew by ... well, you get the picture.
Every example of cut-and-grow relies on up to three factors the U.S. cannot count in 2011: (1) A large growth in exports as a percentage of GDP; (2) A large currency devaluation relative to trading partners; and (3) A large decline in interest rates. We're not an island or a small Scandinavian country, our trading partners are laps ahead of us in the currency depreciation race, and our interest rates are already low.
At the same time, spending will be, and should be, cut. The White House, Congress and various commissions have produced plans to shave $4 trillion off the budget over the next decade, and not even the most liberal iterations relied entirely on tax increases. Middle-of-the-road proposals relied on tax increases for 40-60 percent of total savings. That leaves another 40-60 percent in spending cuts. The goal shouldn't be to cut as deeply as possible by September with unemployment at 9 percent and our bond yields low. The goal should be to phase in cuts prudently to signal to international investors that we're taking care of both the recovery and what comes next.
We want to hear what you think about this article. Submit a letter to the editor or write to firstname.lastname@example.org.