MYTHS AND MYSTERIES OF GOP JOB CREATION

In a previous posting the point was made that what George H.W. Bush called "voodoo economics" in l980, later engraved in the tablets as Reaganomics, has become the fundamental economic policy of Republicans and some conservative Democrats. A key characteristic of that policy of cutting taxes is its clear tilt toward the wealthy and the corporate world. Flanking that tax policy is Republican cut spending policy, meaning mega reductions in the federal budget. Together these tax and spending policies, in the absence of an explicit job creation program, represent the GOP answer to creating new jobs to speed up recovery from the Great Recession.

First, a few comments on the trickle down tax policy described in the previous posting with the imagery of Hubert Humphrey: to feed the birds, you first have to feed the elephants.

The U.S. economy is driven by consumer spending; it represents 70 percent of economic activity in this country. A fundamental part of our current economic problem is lack of consumer spending, thus dragging the economy down. Will trickle down tax policy create jobs and pay checks which in turn will increase consumer demand? It can be argued that it is UNLIKELY that much of the additional money of the tax cuts going to the wealthy and big business would be used for job-creation investments. Corporations are more likely to use their added profits to increase the dividends to shareholders or buy back stock from these shareholders. Another likely use for the added profits would be for buying or merging with other companies, a strategy which often results in job cuts, not additions. Investments in machinery may be made but this often means replacing capital for labor, while the companies making the machinery may or may not add new jobs or rehire laid off workers.

As to the additional money going to shareholders, part of this will go to employees who hold securities through their 401k plans where the money is likely to stay until future retirement. Wealthy shareholders will use some of their money for buying additional shares, the proceeds of which may or may not be used for job-creation investments. With industrial capacity being used at only 75-76 percent, there doesn't seem to be much of an incentive to add to that capacity until there is increased demand which is a function of trickle up (see previous post) economics, not trickle down.

Further, while the GOP talks of corporate tax cuts to spur investments, U.S. corporations are already sitting on about $1.5 trillion in cash, much of it retained and untaxed overseas. If job creation investments through tax cuts are that attractive, then why haven't corporations used some of the cash-on-hand for such investments? In 2005 Congress passed a tax holiday for overseas corporate cash, allowing the corporations for one year to bring home money and it would be taxed at just 5 percent, compared with the normal rate of 35 percent. A recent report indicated that the money brought back did little for job creation, although it did boost revenues for the government. If another such holiday is enacted it may even encourage corporations to shift more jobs abroad to increase their overseas holdings anticipating that every few years they will get a tax holiday.

Second, the cut spending pillar of GOP economic policy. To me this is even more mystical than tax policy as a spur to job creation. This is not to say that spending cuts are not needed; they are needed to restore the fiscal health of the federal government. President Obama and congressional Democrats are biting the bullet on the need to cut spending while at the same time resisting SOME of the specifics. For the GOP, the spending cuts serve both fiscal and philosophic goals. For economic policy mega cuts are a GOP "must" since such cuts in spending are needed to offset the huge losses of revenues through their tax cuts for the wealthy and big business, even with the increased revenues that they say will be generated by the tax cuts. And such cuts are a political demand of the party's fiscal hawks and its tea party supporters. Increasing revenues through increased taxes is a definite "no"to Republicans.

But spending cuts are likely to mean job losses rather than more jobs. For example, the community development block grant (CDBG) funds many jobs at the local level. It can be used for such things as social services, housing rehabilitation, and paving streets and sidewalks. Any of these uses translate into local jobs for those providing soft services or those working on housing rehab or infrastructure jobs. Yet that program is slated for a major cut from the current $4+ billion funding level, and probably total elimination over the next 2-3 years. Likewise for reduced spending for other public works programs such as highway construction and projects of the Army Corps of Engineers, which sometimes fall into the pork barrel category.

Thus what is trickling down is less job-creating federal money at the same time that state and local governments are already making their own big reductions. Over the past several months, state and local governments have chopped over 20,000 jobs per month while industrial jobs have been increasing, although not at a rate needed to lower the unemployment rate. Another piece of evidence is that fewer state and local bond issues are being offered to pay for capital projects which would provide employment.

Fiscally hard pressed states are also providing less money to local governments both through less general aid and less for education, the latter resulting in large layoffs of teachers. Local governments are receiving less money from the states at the same time the locals are experiencing lower revenues from property taxes as assessed property values have been dropping because of the collapse of the housing market. The GOP and tea party followers may say all of this is good because it shrinks government at all levels, a conservative philosophic goal devoutly wished. But the jobs lost in such shrinkage cannot be brushed aside as spending cuts which, by some wave of the wand, become part of an overall GOP job-creation policy.

In short, the GOP should stop trying to create the illusion of having a job creation program based on trickle down tax and spending policies. Support a real job-creation program even if it requires the unthinkable -- a new stimulus program. Such is my own illusion.