Mon, Aug 15, 2011 - Page 7 News List

Republicans defensive as experts question fiscal policy

NY Times, News Service, Washington

The boasts of congressional Republicans about their cost--cutting victories are ringing hollow to some well-known economists, financial analysts and corporate leaders, including some Republicans, who are expressing increasing alarm over Washington’s new austerity.

Their critiques have grown sharper since US President Barack Obama signed his deficit reduction deal with Republicans and, a few days later, when Standard & Poor’s (S&P) downgraded the credit rating of the US.

However, even before that, macroeconomists and private sector forecasters were warning that the direction in which the new House Republican majority had pushed the White House and Congress this year — for immediate spending cuts, no further stimulus measures and no tax increases, ever — was the wrong one for addressing the nation’s two main ills, a weak economy now and projections of unsustainably high federal debt in coming years.

Instead, these critics say, Washington should be focusing on stimulating the economy in the near term to induce people to spend money and create jobs, while simultaneously settling on a long-term plan for paying down federal debts.

There is broad disagreement among economists about the proper balance between spending cuts and tax increases in reducing a government’s debts.

Some studies by both liberal and conservative economists suggest that emphasizing spending cuts is better for long-term growth, but there are few if any precedents for paying down such a large debt solely through spending cuts.

Among those calling for a mix of cuts and revenues are onetime standard-bearers of Republican economic philosophy like Martin Feldstein, an adviser to former US president Ronald Reagan, and Henry Paulson, Treasury secretary to former president George W. Bush, underscoring the deepening divide between party establishment figures and the Tea Party-inspired Republicans in Congress and running for the White House.

“I think the US has every chance of having a good year next year, but the politicians are doing their damnedest to prevent it from happening — the Republicans are — and the Democrats to my eternal bafflement have not stood their ground,” Ian Shepherdson, chief US economist for High Frequency Economics, a research firm, said in an interview.

As for the longer term, Ethan Harris, who is co-head of global economics research at Bank of America, wrote last week: “Given the scale of the debt problem, a credible plan requires both revenue enhancement measures and entitlement reform. Washington’s recent debt deal did not include either.”

That is a common assessment, which may explain why Representative Eric Cantor, the House of Representatives’ majority leader, was defensive about Republicans’ anti-tax absolutism in a memo to his colleagues on Monday last week.

“Over the next several months, there will be tremendous pressure on Congress to prove that S&P’s analysis of the inability of the political parties to bridge our differences is wrong,” Cantor wrote.

“In short, there will be pressure to compromise on tax increases,” he wrote.

However, he added: “We were not elected to raise taxes or take more money out of the pockets of hardworking families and business people.”

Although many forecasters criticize S&P for downgrading the US, they share the company’s disappointment that the budget deal fell short of the “grand bargain” Obama tried to negotiate with House Speaker John Boehner to provide stimulus and cut annual deficits up to US$4 trillion over 10 years.

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