Should Uncle Sam Tighten His Purse Strings?
Republicans operate under the assumption that the root cause of the slow economic recovery is the increase in federal spending after 2008, which has increased the debt, and that reducing this spending will speed the recovery. However, the realities of federal spending are almost the exact opposite; as data from the Bureau of Labor Statistics shows increases in job openings, positive overall job gain, and a reduction in overall employment.
While the federal government is not the sole driving force, consider that the majority of the govenrment’s discretionary spending after 2008 was dedicated to unemployment relief, recapitalizing ailing financial institutions, and economic stimulus. Between TARP (2007-2008) and ARRA (2009), the federal government spent nearly $1.5 trillion to keep the U.S. economy from falling into depression and largely succeeded in that effort. However the Federal Reserve has continued to expand the money supply largely to compensate for sluggish hiring rates and private sector job growth, as private sector industries use the additional cash flowing into economy to line their balance sheets instead of investing it into the economy. Take a look at the following chart that compares growth in employment rates and changes in job openings for all private sector industries.
Notice that after the height of the crisis in 2009, changes in employment have outpaced changes in job openings, signaling that private sector industries have only increased hiring rates enough to restore themselves to their 2008 staffing levels. Essentially, the private sector is being given excessively favorable conditions for hiring, (low interest rates on loans, tax incentives etc) but simply aren’t doing it. Remember, the federal government can aid in the creation of jobs, but without increases to revenue it would need to accrue more debt to take on larger payrolls, which would be damaging to the recovery. As long as private sector hiring rates remain unimpressive, the federal government will have to continue to inject capital into the general economy.
Secondly, the proposed spending reductions would basically move costs from the government’s balance sheet to consumers’ pockets. For example, the potential reform to the Medicare system would institute a voucher program providing a specific amount of money to purchase private health insurance. From the government’s perspective the costs per beneficiary would be more stable and it would save money simply by offering a fixed amount per qualified individual. However, such a plan doesnt account for the ability of private health insurers to inflate their premiums, which are currently unregulated. This means that any difference between the voucher amount and the insurance coverage purchased would be borne by the purchaser, forcing consumers to choose plans that are more cost effective, instead of plans that have the components they need.
The Taxation Question
The Republican position on taxation is that taxes on individuals, corporations and capital gains are too high. High taxes help to inhibit economic activity, because businesses and consumers don’t have as much expendable income to put back into the general economy through spending and investment. However, such a view assumes that lowering the existing rates will generate substantial increases in income which will be invested into the general economy and fuel growth. In the U.S. economy, the effective tax rates paid by entities with the greatest wealth are already low and most major corporations have billions in cash sitting in reserves while the Federal Reserve provides the economy with cash flow. Take at look at the comparison of the effective tax rates paid by individuals at different income levels:
Keep in mind that for gross incomes over $388,350, the top tax rate should be 35%, but while the lowest, second, middle, and fourth quintiiles pay an effective rate more proportionate to their income, the upper extremes do not. This is linked closely to the amount of income that comes from capital gains which are taxed at lower rates, 15% for the highest regular income tax bracket. Based on the data, the highest extreme of incomes actually pay around the same amount in tax as those on the opposing side of the spectrum, and yet the Republican position is that these individuals should pay even less in tax, further shifting the tax burden onto middle and lower income individuals.
A Last Word On Gold
A key portion of the Republican economic agenda is concerned with restricting the ability of the Federal Reserve to increase the money supply, as it deems appropriate, as part of their larger plan to curb the growth of the national debt and lower inflation. Their plan calls for reconsideration of a gold standard for The U.S. dollar, which would apply a fixed weight of gold to a specific value of paper currency, effectively limiting the amount of money that could circulate to the total weight of gold in U.S Treasury Reserves. The thought here is that by limiting the Federal Reserve’s ability to increase the money supply, the U.S dollar will be less susceptible to inflation, giving it greater strength against foreign currencies.
However, this line of argument fails to take into account a basic point: the total quantity of gold ever mined throughout the world is estimated to be around 142,000 metric tons. At the current market price per ounce this quantity of gold is worth around 8.689 trillion dollars. 2011 estimates for U.S. GDP value the U.S economy around 15 trillion dollars, nearly twice the market value of all the gold ever mined worldwide, not to mention that the U.S ranks third in gold production in the world (behind China and Australia who holds the largest reserves in the world). Also, backing the currency using gold actually limits economic growth. With fiat money the central bank can expand the money supply in relation to the demand for money as the economy grows, but with a gold standard there’s an exact limit to how high the money supply can climb thus restricting growth.
There are also international considerations with a gold standard. In years past, the gold standard was used internationally to faciltate currency exchange by establishing set rates of exchange, but this has changed as modern economies have become larger, grow faster, and the demand for money requires more flexible currency. The Republican proposals for a gold standard seem to assume that if the United States were to return to a gold standard so would other nations, but this may not be the case. A gold standard would leave the U.S. dollar vulnerable to manipulation by other nations, who could simply purchase gold bullion from the U.S. treasury or Federal Reserve Banks, thus lowering its value (since less gold = less weight = less value).
Finally, use of a gold standard has wide-reaching, negative complications for the U.S economy. First, the issue of quantity presents a problem since the U.S doesn’t actually have enough gold to represent the value of its economy. Therefore, either the money supply would have to be contracted to coincide with this quantity, or the market price per gold would need to be inflated to compensate. The former would lower inflation, but then could lead to deflation, especially when the demands for money are higher in this period of recession. The latter could prompt another speculative bubble in the gold commodities market, which could pose more systemic dangers to the financial system and the general economy. Its also good to note that using a gold standard allows consumers to convert their paper money into gold, putting an even greater strain on Federal reserves and the overall money supply, particularly in times of economic uncertainly.