Subverting Stimulus

7/29/2019 Subverting Stimulus

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Subverting Stimulus:

How Obstructionism Prolonged Americas Economic Recovery

Michael Caruso

POL498-01: Seminar in Political Science:American Politics in the Obama Era

Dr. Fair

May 1, 2013

Introduction

The United States of America is no stranger to the tides of the economic cycle. Since the end

of World War II, the country has witnessed at least a mild recession every decade. The early

1970s saw crippling stagflation in the face of the Vietnam War and the oil crisis. The subsequent


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energy crisis in 1979 coincided with record-high levels of inflation, leading to a contractionary

monetary policy that sparked another recession that lasted until 1982. However, there is no doubt

among economists that the recession of 2008, or the Great Recession, is the most severe

economic contraction that has taken place since the Great Depression. The steep ditch the credit

crisis left the United States in has contributed to one of the slowest recoveries the country has

ever suffered. Growth in almost every measure, be it GDP, consumer spending, exports, imports,

or payroll has increased on a more gradual rate than any previous recession after 1945 (Rampell

2012). Almost five years after the initial dip, uncertainty reigns supreme.

The question that plagues the minds of most Americans is: why has recovery progressed at

such a sluggish pace? This is a multifaceted inquiry that would receive differing responses

depending on whom it was addressed to. The economist would generally point to uncertainty in

the global and domestic markets that cause reduced job growth and consumer spending. The

political scientist would look to how public policy has played or not played a role in kick-starting

the economy. While both may disagree with the root causes of slow growth, both would accept

the notion that the American government and economy are intertwined, and actions in one sector

have implications for the other. It is with this motivation that I take on the perspective of the

political scientist in explaining the causal factors of reduced economic expansion. In this paper, I

argue that the slow recovery of the Great Recession is owed, in large part, to politicians who

refused, for political gains, to engage in deficit spending.

My argument lays out a two-fold task: proving how the recovery was slowed and substantiating

the notion that it was politically driven. Despite the historical and contemporary success of

Keynesian economic policies in responses to crises, Congressional politicians obstructed deficit

spending to inhibit the governments effective response to the recession. I contend that this was


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motivated not so much by economic reasons, but political ones. Unhampered by politics, the

Obama administration could have embarked on a path of high deficit spending that would have

significantly hastened the recovery process. I will briefly show how these policies had a

significant effect during the Great Depression and the Great Recession, but political

consequences scaled back the ability of the government to remain on this path.This behavior

paid dividends for Congressional Republicans in the Midterm elections in 2010 and continues to

be a major talking point for the party platform. By promoting smaller government, they were

able to pursue ideological goals and appeal to the American people in ways that the Democrats

could not compete with.

Theoretical Framework

To fully understand the depth and breadth of the Great Recession is a worthy task unto itself,

which is why the recovery is the primary subject of analysis in this paper. When the initial crisis

hit, the government took steps to mitigate the damage and eventually stimulate aggregate

demand. The object here is to point to some reasons why the economy has not expanded at a

greater rate since then. To validate the argument that obstructionism in Congress slowed

recovery, merit must also be given to other leading alternative explanations.

The problem of battered state budgets has been persistent since the recession and it

undermines attempts by the federal government to enact stimulus measures. Typically, state and

local governments increase spending during an economic recovery, but the fallout from the

housing bust cut deep holes in states revenue. Due to budget gaps in 2010, 43 states had to

lower services to residents in the form of benefits to state employees and families, layoffs,

contract obligations with vendors, and payments to businesses and nonprofit organizations


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(McNichol and Johnson 2010, 8). Additionally, most of these states had to raise taxes to offset

the losses in revenue. Not only are states enacting policies that cause contraction in the economy,

they are also reducing the money supply that could potentially be used to spur investment.

These deficit-closing measures result in the reduction of aggregate demand that the Federal

government is attempting to stimulate. Data shows that the American Recovery and

Reinvestment Act (ARRA) substantially assisted states in combating their shortfalls so they

could avert looming spending cuts. In 2010, McNichol and Johnson wrote, The amount in

ARRA to help states maintain current activities is about $135 billion to $140 billion over a

roughly 2-year periodor between 30 percent and 40 percent of projected state shortfalls for

fiscal years 2009, 2010, and 2011 (8). The problem is that since 2011, federal assistance has

declined and it has been left largely to the states to balance their budget by any means necessary,

which in almost all cases does not benefit the states economy.

One of the more popular explanations as to why the recovery from this recession is less robust

than in the past centers around reduced demand in the housing sector. Traditionally, the housing

market has provided a significant drive to contracted economies, but tight credit conditions and

uncertainty about further decline in prices has suppressed the usually demand that grows out of a

recession. Federal Reserve chairman Ben Bernanke believes that as prices fall and households

are left underwater on mortgage payments, delinquency or default on those payments causes

stress for financial institutions. He states, Financial pressures on financial institutions and

households have contributed, in turn, to greater caution in the extension of credit and to slower

growth in consumer spending (Bernanke 2011). In this respect, the housing sector is not only

stagnant, but contributing to the repressed economy. Since early 2012, house prices have seen a

rebound as new home sales and foreclosure numbers indicate a healing housing sector. Many


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believe this a result from monetary policy, as the Federal Reserve was able to buy up mortgage-

backed securities (Matthews 2012). However, until unemployment drops or wages increase, the

prospects of a sustainable housing sector that could lead the recovery remain doubtful.

Other factors that retard growth are mainly a by-product of the housing bubble, but have taken

on an identity of their own going forward. Many banks have not recovered from the huge losses

suffered when the mortgage crisis nearly crashed the global financial system. As a result, credit

has been more difficult to come by. For example, to get a mortgage, a borrower must have an

impeccable credit rating and enough cash to make a reasonable down payment (Williams 2012).

Coupled with availability of credit is uncertainty about the future. Firms must take substantial

risks in choosing to expand or invest, therefore not many do. Businesses are unsure about

expanding due to the unknown future of the tax code, the European financial crisis, ineffective

governance, and volatility of prices. From the perspective of the individual, uncertainty about the

future, whether its changes to the tax system or employment, provides enough of an incentive to

save instead of spend. Lower demand keeps the economy stagnant and limited credit keeps those

with the demand from spending. These are all symptoms of an economy that is slowly trudging

out from a deep recession.

The first tenet of my argument posits the notion that government can help cure these ailments,

but politics causes untimely government contraction from the economy, worsening the

symptoms. Republicans in Congress contend that the main objective of the American

government should be on reducing the deficit by cutting spending and loosening regulation,

while spurring investment by reducing taxes across the board. I argue that these policies

contradict popular economic theory regarding the goal of public policy during recessions. The

reason why the financial crisis in 2008 did not result in a situation comparable to the Great


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Depression is because of responsive government spending that successfully alleviated the fallout

from the bust. Now that deficit spending has been curtailed, the economy is recuperating at an

unnecessarily slow pace.

Methods

To confront my primary research question, I will briefly use the cases of the Great Depression

and the Great Recession to show the positive empirics of deficit spending, as well as the negative

consequences that politics had on retarding growth during both eras. Comparing the policy

responses gives insight to how economic thought has evolved over time, but still shows how

politics can constrain the ability of government to follow through. The purpose of using these

cases is to validate the claim that fiscal stimulus helps in times of recession, and that attempts to

subvert these measures are destructive and not reflective of historical success or popular

economic thought. I will not delve into the specifics of the policies implemented during this

time; rather I will define the intention and effect of the overall policy objective. Affirmative

indicators of my argument should show positive correlation between growth in GDP,

employment, and output alongside high government spending. Conversely, times of deficit-

closing measures should result in indicators of economic contraction in the same categories.

The effort put into showing how austerity does not work in times of recession supports the

basis of my primary argument and the motivation for this paper: sponsoring these policies is a

political move first and foremost. Leading up to the 2010 midterm elections, House Republicans

masterfully designed a campaign that emphasized the slow growth out of the recession by

blaming the policies of the Obama administration. By pointing to a growing debt and high

unemployment figures, they were able to ride popular mainstream ideologies, such as ending


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out-of-control spending and fighting for small business. These talking points resonated with the

conservative American populace and culminated an extremely impressive showing of

Republican voters on Tuesday, November 2nd, 2010.

Presentation of Evidence

The case of the Great Depression serves as an invaluable tool for modern economists to study

and extrapolate any lessons that can be applied to current economic woes. Both the initial policy

response in 1929 and reversion to these policies in 1937 give insight into the destructiveness of

budget-balancing provisions during times of stagnation. Conversely, times when government

stimulus spending was high show the positive effect these programs could have. The primary

purpose of studying the Great Depression alongside the Great Recession is to reveal how ideas

about responding to a crisis have changed and to draw comparisons to how the politics of the

time affected the governments ability to construct an effective recovery.

It would be unfair to critique the initial policy response to the Great Depression without

giving heed to the dominant economic doctrines they were implemented under. Pre-depression

fiscal policy was unlike that of recent decades in that there was essentially no fiscal policy. The

government did not attempt to achieve full employment or low inflation through its budget.

Additionally, there was a consensus against countercyclical fiscal policy. The idea that the

government could tune its deficits or surpluses to moderate the business cycle was foreign.

Deficits were involuntary, produced only during times of war, and were paid off rapidly in times

of peace. There were few who believed in the stabilizing ability of deficits in times of recession

because they were seen to increase tax burdens and hinder long-term production and wealth

(DeLong 1998, 70). Other rationale for avoiding countercyclical policies included fears of large


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debts, fears of political consequences, the theoretical benefits a depression could have, and the

problem of implementation. Before Keynes General Theory, there were formidable obstacles in

the way of developing what is now considered sensible fiscal policy. The word spending had a

negative connotation, and economic thinking was still dominated by the concept of the business

cycle (Sweezy 1972, 116).

Thus, the policy response to the Depression was a reflection of the dominant ideologies of the

time. When the stock market crashed in 1929, the first instinct of the government was to do

nothing. This was a method espoused by Secretary of the Treasury Andrew Mellon and his team

the leave it alone liquidationists, a term coined by President Herbert Hoover(DeLong 1998,

75). He believed that letting the Depression run its course without intervention from the

government was the best medicine for the country. He viewed the depression almost as a

Darwinian epidemic that would weed out the weak banks and purge the rottenness out of the

system. However, this response was ultimately not taken by the administration for fear of

instability.

Hoover wanted to take a more activist approach and insisted upon the importance of

maintaining a budget surplus to ensure national stability. Recalling in hisMemoirs, he insisted

upon tax increases because our major sources of revenues, income taxes and corporation profits,

were going out from under us with appalling speed...National stability required that we balance

the budget. To do this, we had to increase taxes on the one hand and, on the other, to reduce

drastically government expenditures (Hoover 1952, 3:132). Hoover argued that restoring

confidence was the first step toward recovery, and the first step toward restoring confidence was

attaining financial stability of the government. In his December 1931 State of the Union address,

he warned about the United States reaching the utmost safe limit of its borrowing capacity, and


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that to supersede these limits would destroy confidence, denude commerce and industry of their

resources, jeopardize the financial system, and actually extend unemployment (132 -33).

While these fears did not altogether prevent an involuntary cyclical deficit, they curtailed a

possible regime shift that would have ended the depression years before it did. To label Hoover

as a budget-cutter would be misguided, but he absolutely strove to be a budget-balancer. He did

not spend willingly until halfway through fiscal year 1932, when he pushed for measures such as

the Reconstruction Finance Corporation, Home Loan Bank, and direct loans to fund relief

programs throughout the states. However, that same year he signed the Revenue Act of 1932 that

increased taxes. One of his most detrimental stances was his support of the monetary policy

under the gold standard. The classic reaction by a central bank to a gold standard crisis consisted

of contractionary policies. As such, the Federal Reserve raised interest rates sharply in October

1931 to avoid devaluation (Eichengreen and Temin 1997). Several other policies that focused on

keeping the gold standard alive contributed to a shrinking money supply. Policy action and

inaction under the Hoover regime resulted in three consecutive years of deflation and depressed

industrial production. By the end of his presidency in 1932, deflation was pegged at 26 percent

and output had declined 30 percent from 1929. During that same time period, unemployment

grew from 3.14 percent to 23.53 (U.S. Bureau of the Census). Personal and firm bankruptcies

rose to record highs, and some 9,000 banks failed between 1930 and 1933. (Wheelock 1992, 4).

Gauti B. Eggertsson suggests that the governments adherence to policy dogmas

constrained its actions. These dogmas consisted of belief in the gold standard, a balanced budget,

and small government. According to Eggertsson, if the Hoover regime had remained in place

in 1933-1937Then output would have continued to decline and been about 30 percent lower in

1937 than in 1933 and 49 percent below the 1929 peak (2008, 1407-08). What ended the sliding


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depression, Eggertsson argues, was a shift in expectations following the election of Franklin

Delano Roosevelt. Thomas Sargent (1983) and Peter Temin and Barry Wigmore (1990) classify

Roosevelts rise to power as a policy regime change, which signaled a shift in expectations

from contractionary to expansionary. Eggertsson writes, The expectation of higher future

inflation lowered real interest rates, thus stimulating demand, while the expectation of higher

future income stimulated demand by raising permanent income (2008, 1476).

Following Roosevelts election, the government went on a spending spree that contributed to

sizeable budget deficits that were, up until that time, uncharacteristic outside of war. Roosevelt

announced that the value of the dollar was no longer pegged to the price of gold. This change

effectively allowed the administration to print money at will to raise inflation and prices. He

signed into law a series of relief bills for the unemployed, an Agricultural Adjustment Act for

farmers, the Banking Act of 1933 (the Glass-Steagall Act), the Securities Act, and the National

Industrial Recovery Act. In 1935, he signed the Social Security and Wagner Acts, as well as

orchestrated a reduction in trade protections (Ferguson 1984, 42-43). Roosevelts New Deal

represented a fundamental and historic change in the conception of fiscal policy.

The radical changes that Roosevelt enacted, which essentially violated the Democratic

presidential platform he ran on, marked a drastic change in expectations. In highly volatile

indicators of the economy, such as commodity prices, the stock market, and monthly investment

index, all rebounded significantly. The stock market, for example, increased 66 percent in

Roosevelts first 100 days and commodity prices skyrocketed. Similarly, investment nearly

doubled in 1933 with the turnaround in March that year (Eggertsson 2008, 1477). Nearly 26

percent deflation turned into 13 percent inflation and output grew 39 percent by the end of his

first term. Unemployment, while still extraordinarily high, dropped ten points in four years to


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14.3 percent. Figure 1 (Eggertsson 2008) displays the turning point that negative economic

indicators underwent after Roosevelts policies were initiated.

The four years following 1933 that marked a severance with old dogmas that bound fiscal

policy to pre-Depression ideologies also marked a period of unprecedented growth. The

American economy appeared to moving toward a full recovery. The good news was short-lived,

however. In 1937, there were efforts made to tighten fiscal policy because concerns over the

public debt had surfaced. From 1929 to 1936, public debt had increased from 16 percent of GDP

to 40 percent (Velde 2009, 18). Faced with strident calls from both Democrats and Republicans


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alike to balance the budget, Roosevelt signed the Revenue Act was passed in 1936, effectively

increasing income tax revenues by 66 percent by the next year. Part of the Act was the

undistributed profits tax, which aimed to encourage firms to pay out dividends that would flow

back into the general capital markets. The tax had little effect on revenue and ultimately played a

role in increasing uncertainty about the profitability of investment (Velde 2009, 20). The tax

hikes were accompanied by slashes in government spending programs and attempts at structural

reform. The Federal Reserve tightened credit and increased reserve requirements, depressing the

money supply. In the summer of 1937, economic indexes plunged more sharply than in the

autumn of 1929, triggering the recession within the depression.

The recession of 1937 was a momentous moment for the future of New Deal liberalism. In

mid-April 1938, Roosevelt once again embraced deficit spending and announced the creation of

the spend-lend program, a $2 billion package that emphasized work relief and public works. The

Fed reversed its policy and cut discount rates to one percent. Economic growth resumed in June

1938 stronger than it had from 1933-1937 (Stewart 2011). Those who argued that stringent fiscal

and monetary policy caused the contraction carried the day over the budget balancers. The

recession is now used as a cautionary tale for those who fight for a premature withdrawal of

government stimulus. John W. Jeffries argues that it was Roosevelts mid-April 1938 decision to

resume spending that triggered a new course for liberal domestic policy. It signaled a growing

acceptance and the significant development of the ideas of John Maynard Keynes, which

eventually shaped current beliefs about the importance of government spending during hard

times. Not only did the 1937 recession substantiate Keynesian fiscal policies, but it revealed the

failure of recurrent pump-priming, or private spending sustaining the economy after government

spending declined. Jeffries writes, the recession brought important Keynesian economists and


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then many other liberals to the conclusion that full-employment prosperity required not recurrent

pump-priming but rather continuing compensatory public spending (1990, 401-02). This

marked a change in thinking that a policy of spending and cutting that looked only at immediate

data is not effective, and to really have positive outcomes there needs to be a constant influx of

money to stimulate demand. This economic theory has come to dominate current ideas for

stimulating growth.

Lessons from the Great Depression and the 1937 recession have given economists invaluable

insight into how governmental tools can be used to manage crises. These lessons materialized

into policy during the 2008 recession, the worst crisis since the Great Depression. Many

economists agree that, while the drop in GDP, unemployment, and prices hardly mirrored the

depths of the 1930s, the recession had the potential to turn into another Great Depression

(Aiginger 2010, Krugman 2010, Eichengreem and ORourke 2009, Blinder and Zandi 2010,

Verick and Islam 2010). What is almost universally accepted as true is that the policy response to

the 2008 crisis had a real and impactful effect on the downturn and prevented the recession from

worsening. Contrasted with the response by the Hoover administration, Presidents Bush and

Obama took proactive measures to both stabilize and stimulate the economy immediately after

the initial crisis hit. Aggressive government actions and a priori automatic stabilizers

successfully guided the recession onto a safe landing and are currently assisting in getting the

economy to take off again.

The two years following the crisis in the fall of 2008 saw aggressive fiscal and monetary

policy initiatives unprecedented in United States history. It involved bipartisan support between

Congress and two presidential administrations, as well as strategic maneuvering by the Federal

Reserve. In early 2009, real GDP was falling at an annual rate of 6 percent, and monthly job


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losses numbered close to 750,000. Just two years later, real GDP was growing at a 3 percent

annual rate and employment had ceased declining (Blinder and Zandi 2010, 2). It began in

October 2008 with the Trouble Asset Relief Program, or TARP. This program had the hefty

price tag of $700 billion in capital that was injected into the nations desperate banks in an effort

to stabilize the freefall of the housing and auto markets. Firms such as AIG, Citigroup, GM,

Wells Fargo, and Bank of America received the largest sums of taxpayer dollars, and the rest was

distributed to hundreds of banks, insurers, and automakers across the country. It is significant to

note that many of these big banks have already paid back these loans to the treasury.

TARP is more informally known as the bailout package and receives much criticism from

economists that argue it was mismanaged. In recent testimony before the Congressional

Oversight Panel, economist Joseph Stiglitz said that TARP has not only been a dismal

failurebut the way the program was managed has, I believe, contributed to the economys

problems (2011). Economists that argue against TARP point towards its negative externalities,

such as the panic surrounding its chaotic rollout and the continued persistence of moral hazard

issues concerning institutions that are deemed too big to fail (Taylor 2011, 5). They also

contend that there were betteroptions that could have been taken that do not neglect Main

Street or carry the rollout costs of TARP. There is very little consensus, however, that no

actions by the government would have been optimal. Letting the banks fail would have had dire

consequences on the state of credit within the US and would have sparked devastating results on

the economy.

By the time President Obama took office, the focus of the economy shifted from stabilizing to

stimulating. The American Recovery and Reinvestment Act passed in early 2009, and it

designated $831 billion through 2011 to various public works projects, relief to safety net


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programs such, state aid, and tax cuts. Compared to the original New Deal, the stimulus bill was

50 percent larger in constant dollars. On the very surface, most economists agree that the Act is

responsible for creating 2.5 million jobs, helping the economy grow by at least 3.8 percent, and

staving off unemployment rates over 12 percent (Firestone 2012). Combined with smaller efforts

of fiscal pumping, by 2010 total expenditures on stimulus efforts were over $1 trillion, nearly 7

percent of GDP.

While TARP and ARRA are highly controversial, in conjunction their stabilizing effects

should not be underrated. Using the Moodys Analytics model of the US economy, Blinder and

Zandi (2010, 4) simulate a scenario in which no extraordinary governmental policies were

undertaken after the initial bankruptcies. This includes TARP, ARRA, smaller stimulus

measures, and any reactionary activity from the Federal Reserve. They find that the economic

downturn would have proceeded until 2011, with real GDP falling 7.4 percent in 2009 and

another 3.7 in 2011. The peak-to-trough decline would have added up to 12 percent, instead of

the actual 4 that took place. Unemployment rates would have peaked at 16.5 percent, with over

16 million jobs lost. The budget deficit would have surged to over $2 trillion over the course of

the recession, and deflation in prices and wages would have resembled that of the Great

Depression. Once again, proactive governmental intervention helped stave off a worsening

economic downturn.

Despite the notion that a crisis was averted, many economists had hopes that the impact that

ARRA had on employment and growth would be significantly greater. The Obama

administration had projected that the ARRA would create 3.5 million jobs by the end of 2010,

but in that same timeframe only 1.5 million jobs had been created. By the time the stimulus

spending subsided in late 2011, the unemployment rate was still floating at an unacceptable 8


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percent. In reference to the disappointing numbers, Verick and Islam (2010) state, It thus seems

fair to conclude that ARRA has had a modest outcome in the specific sense that it staved off a

much bigger surge in unemployment and probably avoided a depression, but did not come close

to restoring full employment (38-39).

There is a notable consensus amongst economists that believe the stimulus was not nearly

large enough to provide the boost the country sorely needed. One calculation (Baker 2009) stated

that the current employment and output gap can only be bridged by a fiscal stimulus package

that is more than three times larger than ARRA (39). Paul Krugman and Laura Tyson echoed

that sentiment, stating that the ARRA does not even cover one third of the spending gap and new

rounds of stimulus were in order to attain the desired policy outcomes. One reason that ARRA

did not pack enough of a punch to kick start growth was that $250 billion of it was allocated

towards tax cuts and deductions. Zandi (2009) shows that the values of fiscal multipliers for tax

cuts range between .30 and .49, while the multipliers for government purchases and transfers are

substantially greater, floating between 1.38 and 1.73. This gives credence to the claim that

government could have achieved more at the same cost by skewing the stimulus package

towards outlays rather than tax cuts (Levy Institute 2009). So why did the US government just

not simply spend more on the ARRA or enact several other large stimulus measures as per the

guidance of leading economists?

By far, the largest impediment to the ability of the US to stimulate its own economy has been

obstructionism in Congress by the Republican Party. Despite historical evidence and many

economists (Feldstein, Summers, Krugman, Stiglitz) urging for greater deficit spending, there

was opposition to President Obamas stimulus package under the pretense of avoiding debt. The

only reason the bill was able to pass through the Senate was because Democrats agreed to pare


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back spending on health programs and education and agree to higher tax relief to win three

crucial Republican votes. When the bill reached the House, it passed 246-183 and received no

votes from Republican representatives. The final bill, that was leaner than the original proposal,

barely passed through Congress, despite the majority of renowned economists within the country

all arguing that it was not nearly large enough. This behavior previewed what would follow: a

seemingly secretpact within the Republican Party to deny support for any of Barack Obamas

policy initiatives without regard for the countrys urgent need for them. The goal of the

Republican party became making Obama a one-term president. What has resulted is an effective

breakdown of government efficiency and a divided government that fuels polarization amongst

the citizenry.

The period in which the Democrats controlled both houses of Congress (2008-2010) was

marked by unprecedented levels in obstructionism via the Senate filibuster. What once used to be

a rare tactic employed to delay a vote on a bill became standard operating procedure. It became

impossible to pass any kind of legislation without a supermajority of 60 votes, as almost

anything sponsored by Democrats or Obama were bound to be filibustered by the Republicans.

From 2006 to January 2013, there have been 391 bills brought to the Senate floor that have been

filibustered through (Wolraich 2013). To an optimist, this could give off the appearance as

genuine debate. Perhaps Republicans truly feel that Obamas stimulus measures would only

exacerbate the problems the country is facing, such as uncontrollable debt and job creation. Even

if that were true, the fact of the matter is that the economy today is not a reflection of Democratic

policies.

There are several key moments throughout the past five years that effectively display how

obstructionism successfully enervated the American economy. The American Jobs Act was a bill


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that the consulting firm Macroeconomic Advisors estimated would create 1.3 million jobs by the

end of 2012 (Krugman 2012). It contained a series of tax cuts and spending increases,

particularly those aimed at sustaining state and local government employment, something that is

sorely needed for states with battered budgets. President Obama said himself that the bill would

not add a cent to the deficit, and would be fully paid for. Yet, when the bill hit the Senate floor,

Republicans filibustered the full $447 billion proposal and eventually blocked subsets of it that

would have increased employment for teachers and first responders, as well as investments into

infrastructure. Senate Majority Leader Harry Reid said of the filibuster:

Republicans unanimously voted against our nations economic health to advance their

narrow political interests. Republicans blocked a bill that would put nearly two million

Americans back to work. And they voted against this job-creating bill despite previously

supporting many of the ideas it contains, such as tax cuts for the middle class and small

businesses (2011).

The bill was broken down into lesser components and did not have nearly the impact

President Obama had hoped for. Republicans continually ask the president to get real about job

creation, but apparently this proposal was not at all what they were looking for. Still, failure to

pass one bill is not enough evidence to damn a partys ambitions.

The ugliness of defective governance reared its head when it came time to vote on the debt

ceiling. In the spring of 2011, federal officials announced the urgency in raising the debt ceiling

so the federal government would be able to meet all of its obligations. There was no apparent

economic issue at stake here, since the interest rates on US Treasury bills were close to zero

percent, and the US government could easily issue new debt to cover its expenses. The problem


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that arose was purely political. Congressional Republicans, especially those involved with the

Tea Party movement, expressed concerns over long-term fiscal deficits. Despite the warnings of

Keynesian economists in pursuing austerity measures so early into recovery, President Obama

agreed with Republicans that slashing deficits was an important task. This was an attempt to

coerce Republicans into voting to raise the debt ceiling, a measure that would prevent the US

from defaulting on its debt. However, Obama believed that raising tax revenues along with

spending cuts was imperative to closing the deficit. Republicans disagreed with this concept, and

a standoff ensued (Buchanan and Dorf, 2012).

In this situation, the Republicans had all the leverage. They could easily play off failure to

pass the debt ceiling as an inability of the Obama administration to take debt reduction seriously.

They knew that the Democrats were at their mercy, but also that not voting on the debt ceiling

would have catastrophic implications. In their eyes, Democrats had no choice to agree to their

demands. This is essentially what happened, as the Budget Control Act was passed along with

the cap raise on the debt ceiling. The Act contained no tax or entitlement reforms and was

comprised entirely of $917 billion in spending cuts that would take effect over the course of the

next ten years. The bill also set up a Joint Select Committee on Deficit Reduction, also known as

the supercommittee, that was tasked with developing a debt reduction plan that would cut an

additional $1.5 trillion over ten years. Contingent on the success of this committee to come up

with a bipartisan agreement was the automatic application of across-the-boards cuts known as

sequestration. If no deal was made, these spending reductions would go into effect on January 2,

2013. In a concentrated effort to meet the American peoples low expectations, the

supercommittee decided to disband on November 21, 2012 without having come to an

agreement. Co-Chairs of the committee, Representative Jeb Hensarling and Senator Patty


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Murray, released a statement regarding the failure, stating, After months of hard work and

intense deliberations, we have come to the conclusion today that it will not be possible to make

any bipartisan agreement available to the public before the committees deadline (2011).

Congress voted to deter the sequestration until March 1, 2013. These encompassing spending

reductions are split between domestic and defense programs, with half affecting discretionary

defense spending and the rest affecting both mandatory and discretionary domestic spending.

Estimates on its impact on the economy vary, but none are positive:

The CBO estimates that the combined federal fiscal tightening taking place in 2013 is

knocking 1.5 points off GDP growth for the year. Of that, about 5/8 of a percent (or

0.565%) is due to the sequester. Macroeconomic Advisers similarly estimates that the

sequester will shave off 0.6 points from the years growth rate. George Mason economist

Stephen Fullersestimatesare more dramatic, putting the loss of 2013 GDP at $215

billion, reducing the growth rate of GDP by two thirds. (Matthews 2013).

Additionally, spending cuts will gut state public sectors, contributing to major national losses

in employment. It would not be out of the ordinary to see unemployment rates remain stagnant or

even rise within the coming months. As a response to the deficit reduction measures, President

Obama and Congressional Democrats are seeking revenue increasing measures, including

closing loopholes and removing subsidies. The debate in Washington has shifted from stimulus

spending to austerity, and the GDP and unemployment numbers are reacting to this. The debt

ceiling debacle and subsequent sequestration displays a change in fiscal policy that is primarily a

result from Republican obstructionism. The recovery has successfully been slowed down.
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Obstructionist measures would be more tolerable if they were steeped in ideology, but

historical evidence reveals that the motivations for delaying the policymaking process are largely

political. This is evident amongst the Republican Partys most influential leaders. Ezra Klein

writes, It has become common for Republicans to deride the very concept of stimulus as absurd,

to mock Keynesian economics as an ivory-tower fantasy, and to oppose temporary tax cuts as a

recession-fighting measure. But during the Bush administration? All that was orthodox

conservative policy (2011). In 2001, Representative Paul Ryan invited conservative economist

Kevin Hassett from the think tank AEI to a hearing to argue in favor of fiscal stimulus. The

economists who studied this were quite surprised to find that fiscal policy in recessions was

reasonably effective, Hassett testified. It is just that folks tried a first punch that was too light

and that generally we didnt get big measures until well into the recession. Even though Paul

Ryan clearly endorsed the idea that light stimulus would do little to kick start a recessed

economy, he conveniently flipped his position on this issue when it came to President Obamas

stimulus bill.

Further evidence that the supposed failures of the stimulus bill are being used as fire power

from the right comes from perhaps the partys mostprominent leader, Speaker of the House John

Boehner. In a statement regarding Obamaspresidency, he said:

At the signing of the stimulus three years ago, President Obama said he wanted to be

held accountable for the results of his spending bingetoday, theres no denying the fact

that his stimulus policies not only failed, they made things worse. You can see the

legacy of the presidents failed stimulus policies all around us: in three straight years of

an unemployment rate above eight percent; in gas prices that have nearly doubled; in the

need for an extension of the payroll tax holiday and unemployment benefits; and in the


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millions of Americans who are still out of work or have simply given up looking for a

job (2012).

All this rhetoric measures up into an effort that Paul Krugman dubs obstruct and exploit.

Since we have already concluded that deficit spending measures help a recessed economy and

cutting those expenditures may hurt chances of recovery, the only possible explanation as to why

Republicans choose to obstruct is so they could win elections. By simultaneously separating the

Republicans from the Democratic policies endorsed by Obama and effectively sabotaging any

chance of their success, the Republicans are free to campaign against those policies and appeal to

the ideologies of their constituents. This allows them to champion ideas of fiscal conservatism,

cutting taxes, and small government without the association of hypocrisy. Additionally, they can

downplay the effectiveness of the failed stimulus policies that were only passed through

intense compromise and not nearly as large a prescription that the symptoms called for. They can

point to the growing debt and poor jobs numbers and show their constituents that Obamas

policies are simply not working, despite the stonewalling that made those policies dead on

arrival.

These are the ideological views that resonate with the American people, and pursuing them is

the greatest weapon Republicans can employ against Democrats. If elections are any indicator of

a political partys strategic success, then the 2010 Midterm Elections validated everything the

Republicans were doing for two years prior. The result was the largest reshuffling of the House

in fifty years, as Republicans picked up a net 63 seats, establishing a 242-193 majority. They

also won six seats in the Senate, making it virtually impossible for the Democratic majority to

ever earn enough votes for cloture. This seat change was viewed as a referendum on the current

political landscape by Republicans who were fed up with the failed policies of Barack Obama


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and the Democrats in Congress. In reality, Congressional Republicans were able to masterfully

manipulate their constituents into believing a false truth: that their policies work and Obamas do

not.

If there is any doubt that fiscal stimulus was not the appropriate path to take and austerity was

the correct policy choice, basic research would quickly dismiss that notion. An article by

Eduardo Porter ofThe New York Times goes to great lengths to argue against austerity measures

to promote growth by comparing policy alternatives overseas. Similar to the US, many European

countries reversed policy direction from stimulus to fiscal adjustment. Doing so, they believed,

would restore confidence to investors and businesses that government finances were under

control. In turn, capital inflows would bolster the economy and expedite growth. These are the

basic motivations to austerity reforms. In Europe, the results have been disastrous, to say the

least.

For Britain, the coalition government of David Cameron came into office in 2010 with

promises to reverse the stimulus policies of his predecessor. He asked government departments

to reduce their budgets by 25 to 40 percent, effectively cutting spending across the board.

Fortunately, cuts like these pale in comparison to any reductions the US could muster. These

measures successfully halted the recovery that was taking place and contributed to 18 months of

almost no growth in GDP and even contraction in some cases. On top of that, their burden of

debt actually increased substantially since Cameron took over. Although it seems illogical that

cutting deficits and raising taxes would increase the debt, it falls in line with Keynes Paradox of

Thrift. He contends that if everyone attempts to save money in a recessed economy, aggregate

demand would fall and in turn lower total savings due to the decrease in consumption and

growth. For Keynes, a down economy with no stimulation from both the population and the


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government is a recipe for disaster. Despite trying to save, government revenue would decrease

so much that cutting costs would not cover the deficiency. This is what is happening to Britain

and economies all across Europe that adoptedor were forced to adoptausterity. They should

serve as an excellent example to US politicians as to what not to do ruin a recovering economy.

So far, those lessons do not seem to be reaching us.

Although Republican efforts at deficit-reduction do not mirror the severity of those in Europe,

the effects of their policy alternatives from the start would have been minimal. For example, if

they were to design the stimulus package, it would have been no doubt smaller and focused

largely on tax cuts and incentives and less on spending cuts. Not much attention would have

been directed at strengthening safety net programs or transfers for struggling states. Porter

writes, Most economists say they believe that tax cuts and rebates would have been less likely

to generate new sales than direct government spending, because households swamped by debt

were likely to save their windfall (2012). It appears that Bushs and Obamas reaction to the

crisis were at the time criticized, but many economists that have seen the devastation wrought by

austerity throughout Europe look to US policy in the first years of recession as a guideline for

growth. Once again, history has shown that austerity is not the answer for a recession.

On the surface, the results of the 2012 election appear to mark a significant reversal from the

American public on their feelings about the economy. President Obama won re-election and

Democrats gained seats in both houses of Congress. Although liberals would like to think that

the American people smartened up and realized the damage that obstructionism causes, this is

very unlikely. The 2010 Midterms represented the perfect storm for Democrats. The economy

was still in a very rough spot and their guy was in charge. Not to mention that conservative

voters always show up to the polls in greater numbers during midterms. The Republicans were


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able to supercharge their base and the Tea Party contributed to vast mobilization effects across

the country. For the 2012 elections, the economy was not a particularly strong predictor. Despite

the always-accurate IHS Formula predicting a decisive Obama loss (Woolhouse 2012) and

Romney consistently polling better on his ability to handle the economy throughout the

majority of the campaign, Obama was still able to pull out a victory. This can be attributed to

many alternative factors, the detailing of which is outside the scope of this paper. The key point

to remember is that the economy, the Republicans strongest issue, was not a major deciding

factor in the 2012 elections.

It would be fairly safe to assume that the deficit was never the primary motivation for

Republicans to engage in massive obstructionism and policy deflection. This is not to say that

they do not care at all about the deficit. An unsustainable debt is absolutely a problem for every

country and it should be addressed, but only when it is financially advantageous to do so. If

focusing on cutting spending to balance the budget results in an economic contraction, it makes

one ponder the logic in such a self-defeating practice. In investigating the motives of such

behavior, Paul Krugman concludes:

At this point, then, its clear that the deficit-scold movement was based on bad economic

analysis. But thats not all: there was also clearly a lot of bad faith involved, as the scolds

tried to exploit an economic (not fiscal) crisis on behalf of a political agenda that had

nothing to do with deficits (2013).

Other contradictory behavior tends to create skepticism about true intentions. For example,

Republicans receive a great deal of criticism for claiming to be advocates of fiscal responsibility,

but at the same time desire to give tax cuts to the richest Americans. This is also under the guise


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of promoting growth and job creation, but once again history has revealed the inherent flaws

within supply-side economics and the trickle-down theory. As a party, they must figure out how

to extend their appeal to more demographics, but the problem they will always run into is that

their economic policies are disadvantageous for almost every single group of people besides their

current core supporters: white men. Fighting for spending cuts that would undoubtedly affect

lower-income demographics undermines their chances of developing any kind of coalition that

could stand up to the Democrats growing base. Perhaps the coming elections may spark a

change within the party and reverse the decades-long trend towards the far right.

Conclusion

The US recovery from the Great Recession has been uncharacteristically slow when

compared to past recoveries, and most economists agree that it has been the slowest recovery

from a recession since World War II. This is understandable given the depths of the crisis, but

unacceptable due to the possibilities that public policy could have on stimulating growth. While

the tools were there, there were unbending impediments to implementing fiscal expansionary

measures that materialized within the Republican Party. Adopting a policy of obstructionism, the

party felt that its political future hinged on the success of Barack Obama as president. Preventing

his policies from succeeding became top priority amongst Republicans. This meant voting

against stimulus measures and promoting deficit-reduction at all costs. This method paid off

immensely in the 2010 Midterm elections with the Republicans seeing an overturn of seats that

had not taken place since the 1930s.

This type of behavior would have been acceptable in times of boom, except history has shown

that austerity within times of recession only exacerbates economic hardships. The instances in


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which it was implemented during the Great Depression, pre-1933 and post-1936, resulted in

unmitigated disaster for an economy that was recovering from awful conditions. Only a reversion

to high spending was able to provide the much needed boost. This was apparent during the early

years of the Great Recession, when a declining output and surging unemployment rate were cut

short by efforts at stabilization and stimulation through government deficit-spending. The Obama

administration successfully staved off depression, but Republican obstructionism cut short

further efforts for stimulus. Unprecedented usage of the filibuster combined with the debt ceiling

debacle put Republicans in a very favorable position for policy maneuvering. They essentially

held the economy hostage and their demands were in the form of budget cuts. Now, the national

discourse has shifted from debates about how to stimulate the economy into how to best close the

deficit. Economists say that this policy reversion is too premature within an economy that is only

starting to rebound from a recession.

With the passage of the sequestration and Budget Control Act, the US should not be surprised

to find a slight economic contraction and underperformance in terms of job creation and output.

Growth is expected to decline without government stimulus and cuts to the public sector will

lead to high rates of unemployment. For the Republicans, this result would theoretically help

them, because once again they could point to the sluggish economy and put the brunt of the

blame Obamas failed policies. They maybe looking at further electoral victories within the

House in 2014, but not nearly at the same scale as 2010. This much is true: a policy of obstruct

and exploit can only last for so long. At some point the party will have to adopt a policy that

promotes growth without gutting spending in an effort to reach out to a broader base. The future

of the Republican Party may very well rest with that necessary transformation.


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Documents

Subverting Stimulus