1 Center or American Progress | The Consequences oConservative Economic Policy The Consequences of Conservative Economic Policy A Tried and Failed Approach that Should not be Repeated Adam S. Hersh, Michael Ettlinger, and Kalen P russ October 2010 Introduction Te Greaecession deala crushing blow o he well-being ohe American people, buour economy had acually been in a ough spoor many years. Beore PresidenGeorge W . Bush lea deep nancial crisis and economic collapse on PresidenBarack Obama’s doorsep, he presided over wo erms olaissez-aire supply-side policies hayielded he weakesexpansion in recenU.S. economic hisory, marked by epid job growh, weak privae invesmen, sagnanamilyincomes, and a hosooher ills hamouning housing and nancial bubbles helped parially obscure. TaPresidenBush ook no acion o address he unda- menal weakness ohe Amer ican economy and proecirom nancial collapse was a ragic ailure—buiwas a ragic ailure o be expeced by a conservaive presidenpracicing conservaive economics. Tis approach sowed he seeds or oday’s ederal budgedeci, nancial cri- sis, and he Greaecession. And iis no less ragic hahose w ho share hapresiden’ s philosophy—and who sil l reain power hrough heir posiions in Congres s—are compounding heir ideological broher’s misakes by sanding in he way oeconomic progress and growh. Aer he Obama adminisraion ook oce in January 2009, conservaives in Congress worked hard o weaken he Amer ican ecovery and einvesmenAc, ougheors o reorm our nancial sysem, and demanded ax breaks or he richesohe rich in exchange or exending unemploymenbenes or hose who losheir jobs hrough no auloheir own. Now , “Pledge o America” promises more ohe same or he American people in he second decade o
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8/8/2019 The Consequences of Conservative Economic Policy
3 Center or American Progress | The Consequences o Conservative Economic Policy
I sared wih he American ecovery and einvesmen Ac, which conservaive
senaors ough in general and hen worked o weaken by sripping ou more eec-
ive job-creaing provisions in avor o less eecive conservaive prioriies. Tese
changes, some o which were disdained by even conservaive economiss, ensured
ha axpayers go less economic bang or heir buck han hey should have. Te
ecovery Ac saved or creaed millions o jobs, bu i could have done more.
Te deah o Democraic Sen. ed Kennedy o Massachusets and his replacemen
by epublican Sen. Scot Brown increased conservaive power, making i almos
impossible o ake addiional seps o improve our economy. Among oher poli-
cies, conservaives over he pas wo years delayed and waered down eors o:
• Provide lending o small businesses and sar-up companies• Creae jobs by oering privae employers a payroll ax cu• Preven layos o eachers and criical service providers in sae and local
governmens o avoid urher weakening o he labor marke• Exend unemploymen insurance benes o long-erm unemployed workers o
help keep up economic demand
Wha’s more, i he recenly mined “Pledge o America” epublican policy pla-
orm is any guide, hen devoion o bankrup—and bankruping—conservaive
policies isn’ jus an embracing o pas policies or blocking o curren proposals.
I is, in ac, heir blueprin or he uure as well. Undersanding he devasaing
consequences o conservaive economic policies in he 21s cenury, hen, is he
aim o his policy memo.
The Bush-era economy: Laissez-faire too far
Presiden Bush’s economic policy agenda consised o litle more han supply-side
ax cus paired wih a disdain or pruden regulaion. Te Bush ax cus, his admin-
israion argued, would pu money in he hands o hose people bes posiioned
o make invesmens and creae jobs. Wha we see all oo painully now is ha
supply-side ax cu policies were, as hey have been in he pas, an abjec ailure.1
Te resuls are well known, bu worh repeaing. Te ax cus ocused on he
wealhy, reversed he ederal budge surplus le by Presiden Bill Clinon, and
resuled in escalaing budge decis ha le our counry scally weakened going
ino he Grea ecession. And in he 2000s under Bush adminisraion policies,
6 Center or American Progress | The Consequences o Conservative Economic Policy
and he Senae o he new 111h Congress, proposing a range o spending and ax
relie o promoe public and privae invesmen and household consumpion ha
would creae jobs.
Firs, he good news: he ecovery Ac was eecive. I provided, among oher
hings, $98 billion or public ransporaion and inrasrucure invesmen, $71 bil-lion or creaing green jobs, $116 billion or he making work pay middle-class ax
cu—a saple o Presiden Obama’s elecion plaorm—an expanded earned income
ax credi, and exended emergency unemploymen benes ha were se o expire.
Economiss Mark Zandi and Alan Blinder—respecively, ormer presidenial cam-
paign advisor o Sen. John McCain (-AZ), and Princeon Universiy proessor
and ormer Vice Chairman o he Federal eserve—nd ha he ecovery Ac
increased real GDP by 3.4 percen, lowered he unemploymen rae by 1.5 per-
cenage poins, and added 2.7 million jobs o he economy.5 Te Obama adminis-
raion’s own assessmen rom he Council o Economic Advisors ound ha heecovery Ac increased GDP by 2.7 percen o 3.2 percen, and increased employ-
men by 2.5 million o 3.6 million.6
Te nonparisan Congressional Budge Oce esimaes ha he ecovery Ac
increased real GDP by 1.7 percen o 4.2 percen, lowered he unemploymen
rae by 0.7 percenage poins o 1.5 percenage poins, and increased employmen
by 1.2 million o 2.8 million jobs relaive o where he economy would have been
wihou i.7 Te business communiy also ound he ecovery Ac eecive. In a
Wall Sree Journal Survey o business economiss in March 2010, 75 percen o
respondens concluded ha he ecovery Ac resuled in a ne posiive gain or
U.S. economic growh. Tis is abou as close o unanimous as economiss ge.
Bu he ecovery Ac would have been even more eecive had no conservaives
go heir ngers in he pie. Alhough conservaives did no have srong sway in he
House, hey did in he Senae. A he ime o passage here were 57 Democras
and one progressive independen in he Senae—making he garnering o he
needed 60 olks a challenge in oday’s highly parisan environmen. In addiion,
Presiden Obama and leaders in he Senae wished or his rs iniiaive o he
new presidency o be an example o biparisan cooperaion. Given his objecive,and he challenge o geting 60 voes, concessions o conservaives o boh paries
7 Center or American Progress | The Consequences o Conservative Economic Policy
Te House passed he ecovery Ac in jus wo days—wih no epublicans voing
or he bill. Te House bill came in a a oal o $820 billion, providing $545 bil-
lion in spending and $275 billion in ax cus—mos o i o be spen in wo years.
In conras o he speedy work o he House, conservaives in he Senae held up
he ecovery Ac or wo weeks beore allowing a voe. Alhough he Senae bill
came in wih a higher price a $838 billion, in he ensuing ime conservaives man-aged o srip money away rom job-creaing provisions, moving unds o provi-
sions wih much weaker economic impacs.
Tere were a number o key dierences beween he House-passed bill and he
version passed by he more conservaive Senae. One example was aid o sae and
local governmens. Wih sae-and-local-governmen ax revenues plunging in he
recession, hose governmens (mosly barred rom deci spending) can become
a big par o he problem. Pouring laid o public employees ino a pool o unem-
ployed privae secor workers hurs everyone. Tose erswhile public employees
join he laid o privae secor workers in compeiion or wha ew jobs are avail-able. Adding o he numbers o workers wihou jobs who are reining in heir per-
sonal spending means even ewer cusomers in sores, which means in urn more
privae secor layos and lower invesmen. Cubacks in sae-and-local spending
beyond he salaries o public employees also has he eec o pulling back one o
he major cusomers or he privae secor—escalaing wha was already being
called he Grea ecession.
Federal aid o he saes is one o he mos powerul opions or priming economic
aciviy. By prevening layos and urloughs o criical public employees (each-
ers, rs responders, and so on) and mainaining public spending levels, aid o he
saes spurs demand or privae secor oupu and prevens a vicious cycle o spi-
raling recession. Te House bill proposed $172.5 billion o sae and local govern-
mens; he Senae bill oered $38 billion less. I conservaives had prevailed, he
ecovery Ac would have delivered 182,000 ewer jobs under he lower Senae
bill spending on sae aid.8 In he end, Senae conservaives sill managed o bleed
$25 billion o sae and local aid spending rom he House proposal in he nal bill
enaced resuling in an esimaed 120,000 ewer jobs.9
Conservaives pu he pinch on several addiional key provisions. Conservaivescu Presiden Obama’s “making work pay” middle class ax relie by $26 billion, and
cu in hal he unds provided or public school consrucion.10 For he mos par,
he provisions ha replaced he eecive measures ha were aken ou were ar
less eecive. ake, or example, he $70 billion exension o alernaive minimum
9 Center or American Progress | The Consequences o Conservative Economic Policy
Consider hese job gures. Monhly employmen losses during he Grea
ecession peaked a 779,000 jobs in February o 2008, jus weeks aer Presiden
Obama’s inauguraion. Wih he help o he ecovery Ac enaced in lae February,
monhly employmen losses began slowing and evenually reversed he negaive
economic momenum o yield susained monhly privae secor employmen
gains. Te pace o job creaion is, however, obviously sill no as enough.
Darned if you don’t
Te ecovery Ac, however, was jus an opening salvo o progressive policy eors
o spur job creaion. By he summer o 2009 i was clear ha more suppor or
economic recovery would be needed. In June, he House passed a bill oering
$175 billion or a range o provisions o spur job creaion and economic growh,
including unds or:
• Public inrasrucure and ransporaion invesmen• Clean energy and waer invesmens• Educaion and school renovaions• Suppor o small business lending and invesmens in innovaive echnologies• Aid o sae governmens in Medicaid maching unds and COBR healh insur-
ance paymens or laid-o workers• Exended unemploymen benes, job raining, and workorce developmen• Job creaion or rs responders, law enorcemen, and summer youh employmen
Known a he ime as he “Jobs or Main Sree Ac,” he bill acually enjoyed more
biparisan suppor han mos in he 111h Congress—24 epublicans joined wih
235 Democras in voing yea in he House.
Bu he bill hi a brick wall wih conservaives in he Senae. I languished here or
anoher ve monhs, unil November 5, 2009 when Senae progressives were able
o overcome conservaive hreas o a libuser by cuting he bill down o jus
$17.5 billion, one enh o he size o he House bill. Insead o he ambiious pro-
visions in he original House bill, he pared-down bill swiched o a small payroll
ax cu or employers hiring new workers, acceleraion o depreciaion o capialinvesmens by business, a small expansion o he Build America Bonds program,
and a emporary one-year reauhorizaion o he highway rus und. enamed he
Hiring Incenives o esore Employmen Ac, or HIE, his more modes help
ook an addiional our monhs o work ou he dierences beween he House
8/8/2019 The Consequences of Conservative Economic Policy
14 Center or American Progress | The Consequences o Conservative Economic Policy
analysis shows ha puting he plan’s proposals ino place would cause he ederal
budge deci and deb o grow much aser han hey would under Presiden
Obama’s budge. Te deci would be $200 billion larger in 2020 under “Pledge o
America,” and $1.5 rillion larger by 2030, while he ederal deb would rise above
93 percen o GDP wih ineres paymens surpassing $1 rillion a year.
Te deci spikes under he pledge because massive ax cus lie a he cener o
is budge, which exends all expiring ax provisions and makes several big new
cus. evenues would all o 16.7 percen o GDP as a resul, compared o he
20 percen o GDP achieved las ime he ederal governmen ran a balanced bud-
ge rom 1998 o 2001. Te “Pledge o America” promises o se “hard caps” on
spending o make up or he los revenue, bu he ew deails oered don’ add up,
leaving decis and deb o grow unchecked.
Te botom line is ha he pledge merely recycles he same ailed Bush poli-
cies ha caused he six years o jobless economic growh ollowed by he Greaecession and oday’s curren malaise in he broader economy accompanied by
los o ederal red ink—a relenless ocus on ax cus or he riches Americans.
Michael Etlinger is vice presiden for economic policy a he Cener for American
Progress. Adam Hersh is an economis a he Cener. Kalen Pruss is an adminisraive
assisan for he Cener’s execuive eam.
Endnotes
1 Michael Ettlinger and John S. Irons, “Take a Walk on the Supply Side” (Washington: Center or American Progress,2008),available at http://www.americanprogress.org/issues/2008/09/supply_side.html.
2 Josh L. Bivens and John S. Irons, “A Feeble Recovery: The undamental economic weaknesses o the 2001-07 expansion.”EPI Brieng Paper #214, available at http://www.epi.org/publications/entry/bp214/.
3 Christian E. Weller, “Drowning in Deb.” (Washington: Center or American Progress, 2006), available at http://www.ameri-canprogress.org/issues/2006/05/b1655517.html; Amanda Logan and Christian E. Weller, “Bush’s Bankruptcy Legacy:
Three Years and Nearly 1.5 Million Bank ruptcy Filings Later” (Washington: Center or American Progress, 2008), availableat http://www.americanprogress.org/issues/2008/04/bankruptcy_column.html.
4 Measured in real 2009 dollars.
5 Mark Zandi and Alan Blinder, “How the Great Recession was Brought to an End,” Economy.com, July 27, 2010, available athttp://www.economy.com/mark-zandi/documents/End-o-Great-Recession.pd .
6 Council o Economic Advisors. “The Economic Impact o the American Recovery and Reinvestment Act o 2009: Fourth
Quarterly Report” (2010) , available at http://www.whitehouse.gov/administration/eop/cea/actsheets-reports/econom-ic-impact-arra-4th-quarterly-report/summary.
7 Congressional Budget Ofce, “Estimated Impact o the American Recovery and Reinvestment Act on Employment andEconomic Output” (2010), available at http://www.cbo.gov/tpdocs/115xx/doc11525/05-25-ARRA.pd.
8 Will Straw, “Cuts to Senate Recovery Bill Mean Fewer Jobs in States” (Washington: Center or American Progress, 2009),available at http://www.americanprogress.org/issues/2009/02/senate_cuts.html.
9 Estimate is based on the implicit job multiplier or state and local government aid.
10 David Rogers , “Early Setbacks Test Obama’s Cool,”Politico , February 13, 2009.
11 Douglas W. Elmendor, “Policies or Increasing Economic Growth and Employment in the Short Term,” Testimony to theJoint Economic Committee, February 23, 2010, available at http://www.cbo.gov/tpdocs/112xx/doc11255/Unemploy-ment_Testimony.shtml.
12 Michael Ettlinger, “Corporate Tax Break Puts the Cart Beore the Horse” (Washington: Center or American Progress, 2009),available at http://www.americanprogress.org/issues/2009/02/nol.html.
13 Martin Feldstein, “An $800 Billion Mistake,”The Washington Post , January 29, 2009.
14 Congressional Quarterly, “The Economic Stimulus Agreement,” Congressional Quarterly House Action Reports No. 111-1 (2009), available at http://stimulus.ms.gov/msgo/mssr.ns/webpageedit/LN_RL_Page_LOLAR_SPL_GSOAPFANP/$FILE/cqSummary.pd?OpenElement.
15 Council o Economic Advisors, “An Economic Analysis o Inrastructure Investment” (2010), available athttp://www.white-house.gov/sites/deault/les/inrastructure_investment_report.pd .
16 Small Business Jobs and Credit Act of 2010 , Public Law 111-240, 111th Cong. available at, http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR5297:/.
17 Michael Linden, “Chipping Away at the Estate Tax,” (Washington: Center or American Progress, 2009), available at http://www.americanprogress.org/issues/2009/12/chipping_away.html.
18 CBO estimates that extending the AMT or reducing income taxes in 2011 would only yield $ .10 to $.40 or each dollar spent.
19 Emergency Unemployment Insurance, H.R. 2642 contained in “The Supplemental Appropriations Act o 2008” Title IV.November 21, 2008, available at http://en.wikisource.org/wiki/Supplemental_Appropriations_Act,_2008; The Unemploy-ment Extension Act of 2008, Public Law 110-449, 110th Cong. (November 21, 2008), available at http://www.ows.doleta.