GOP-Cited Economists Skeptical of Party’s Stimulus Plans
Tuesday, February 10, 2009 at 12:59 pm
?Republicans began this week on an upswing, confident that their unanimous vote in the House and lopsided vote in the Senate against the Democrats’ economic stimulus package were building back up their reputation as fiscal conservatives. Rep. Eric Cantor (R-Va.), the party’s whip in the House, told The Washington Post that Republicans had received “a shot in the arm” by “standing up on principle and just saying no.”
The party’s opposition strategy is predicated on a big bet — that the package of spending increases and tax cuts being voted on Tuesday will not register economic gains. Republicans argue, instead, that their alternative bills introduced and defeated in the House and Senate would have promised more growth at a lower cost. But a source that Republicans cite most often to back up this argument does not, in fact, prove that their plans will work. An open letter signed by more than three hundred libertarian-leaning economists, many of whom reject the idea of any government intervention to combat the recession, reveals the challenge that Republicans face in building credible economic arguments against the new president’s agenda.
On Jan. 9, then-President-elect Barack Obama argued that there was “no disagreement that we need action by our government” to “jumpstart our economy.” In short order, the Cato Institute, a libertarian think tank founded in 1978, began contacting economists who disagreed with that statement. “We knew who to contact,” said William Nikasen, who served as chairman of Cato from 1985 until his retirement last year, and who was tasked with identifying more eminent economists and Nobel Prize laureates to add to the list. “It wasn’t hard.”
Cato circulated a statement that read, in part, that “notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance.” The think tank rapidly collected the signatures of more than 300-libertarian-leaning economists, and as January closed it gave Republicans a heads up that the statement would appear in a full-page newspaper ad. The first many people saw of the ad was at a Senate Republican press conference, where Sen. Roger Wicker (R-Miss.) waved it above his head to make the case that the experts did not support President Obama’s plans.
In a Feb. 3 floor speech, Rep. Mike Pence (R-Ind.) cited the ad as proof that “many leading economists” were “catching on about this bill.” The third-ranking Republican in the House pushed the ad again this Sunday on Meet the Press. “There’s an enormous amount of economists who think this is the wrong way to go,” he said. “Some 300 published a full-page ad this week.”
What’s been left unsaid is that the economists brought together by Cato do, in fact, represent a minority view of recession economics. Also left unsaid is that many of the economists that Rep. Pence, Sen. Wicker, and other Republicans have cited do not favor the House or Senate Republicans’ stimulus plans, or even the amendments that Senate Republicans were able to pass last week.
On Monday, a selection of the Cato letter economists from across the country were asked by TWI to analyze the Republican Study Committee’s Economic Recovery and Middle-Class Tax Relief Act, which failed in the House, and the $15,000 tax credit for homeowners, which was added to the stimulus via an amendment by Sen. Johnny Isakson (R-Ga.). Their opinions ranged from outright enthusiasm to, more often, head-shaking skepticism.
Burton Abrams, an economics professor at the University of Delaware, disagreed with the entire premise of the Republicans solutions. “It’s not clear to me that any kind of tax or spending is the right response,” Abrams said. “Sometimes, nothing is the best policy.”
Abrams fretted that one Republican proposal, a capital gains tax holiday, would simply apply downward pressure on stocks. Another RSC idea, a one percent, across-the-board cut in non-defense discretionary spending, struck Abrams as poorly timed. “To do that in the midst of a major downturn would be a mistake,” he said. “But again, I’m not sure any immediate reaction is a good reaction.”
Few of the economists said they liked the biggest Republican legislative success of the stimulus debate, the homeowner tax credit. In the words of Howard Baejter Jr., a professor at Towson University in Maryland, it was “more goddamned social engineering through the tax code.” Jeff Miron, a professor at Harvard University, called the proposal “completely insane,” as it’s “counter-productive to have, as our goal, propping up housing prices. It will end up costing us more down the line if avoid letting them fall to appropriate values right now.”
Baejter argued in favor of the across-the-board spending cuts, with the caveat that it “seems like a paltry amount in the right direction.” An effective spending cut, according to Baejter, would be “10 or 15 times larger than that.”
Several of the economists who’d signed the Cato letter disagreed with an RSC proposal to slash the corporate tax rate from 35 percent to 25 percent, though they did not disagree with the concept. “In my opinion it should go further,” said Lee Ohanian, a professor at the University of California, Los Angeles. “Over the last thirty to forty years people in the economics profession have concluded that taxing corporations is not good idea. The rate most people arrive at, for an appropriate level of taxation, is close to zero.”
Lee Adkins, a professor of economics at Oklahoma State University, held the opposite view of the stimulus. “[Policy makers are] acting like this is the worst thing ever to happen to the country,” he said, talking down spending and tax cuts both.
“This is just not that bad yet. The best thing they could do right now is nothing.” John Dobra, a professor at the University of Nevada, Reno and fellow at the free market Nevada Policy Research Institute, argued that the economic crisis had been “overblown” and had not yet reached even the levels of the 1981-1982 downtown. “Capitalism is about creative destruction,” said Dobra, “and you can’t just prop up people who make bad decisions.”
Miron held an opinion rather rare among the economists who signed the Cato letter. While he opposed the stimulus package, he did not worry that it would “particularly impede” an economic recovery. “I think we’ll get out in six to 12 months with or without a stimulus. There’s the matter of all the debt that this creates, but if we recover, the impact to the debt and the deficit will go away.”
One of the Cato letter economists endorsed all of the GOP’s ideas for an alternative stimulus. “I like all the proposals,” said Peter Lewin, a professor at the University of Texas at Dallas.
On Monday, Republicans in the House Conference Committee did not respond to any of these economists’ comments. But the lack of robust support for Republican stimulus proposals complicates GOP efforts to push back when President Obama says, as he did last night in his first prime time press conference, that “most economists, almost unanimously” agree with Keynsian spending as a way of preventing a deeper recession.
“If the Republicans were in charge they’d be doing the same thing,” said Adkins, the Oklahoma State University professor. “The money would just be going to different districts.”
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