House Republicans

It's been good to hear that Barack Obama now feels less pressure to accept bad compromises following his successful re-election bid, but as we approach the coming 'fiscal cliff', my biggest concern is not the President's tendency to triangulate.

What worries me far more is the likelihood that Congressional Democrats will miss out on a golden opportunity to seriously damage the Republican brand in the next several weeks, which is the very thing they must do if they want to regain control of the House of Representatives in 2014.

It is something they will be able to do if they can find a way to get themselves all on the same page regarding THE BLAME THAT THE REPUBLICAN PARTY DESERVES FOR CREATING THE CURRENT GOVERNMENT DEBT CRISIS.

They need to direct the attention of the media to the irony that while the Republicans are sounding the alarm about government debt, calling it a crisis, it is they who created the problem to begin with, back when they irresponsibly reduced the tax obligations of America's millionaires and billionaires during the George Bush Administration.

Democratic leaders should not hesitate to announce to the press that they have one very simple message they want to deliver to the Republicans in the House:

"First undo what your party did to create this budget crisis.  Then, with your credibility at least partly restored, we can talk about your ideas on government spending."

It was, after all, House Republicans who created the current crisis a decade ago when they decided to reduce the higher tax rates that the Top Two Percent of income earners in our country had paid throughout the Clinton Boom Years without any ill effects.

If the Republicans had not written those rate cuts into the Tax Code, the total amount of revenues the federal government would have collected since that time would have been so substantial (one estimate: $5.9 trillion) that very little borrowing would have been necessary to cover the federal government's spending throughout Obama's first term.

Tax cuts for rich people cause tax revenues to drop

Democrats can now say---without any doubts whatsoever---that the 'Debt Crisis' was created by the tax-cut gift that The Republicans decided to give to their wealthiest campaign contributors when George Bush was President.

Every elected Democrat in Congress needs to repeat this message to the media in hiser own way: Restore the higher tax rates that rich people paid during the Bill Clinton administration [the last time we experienced economic prosperity as a nation] and the debt crisis will automatically be fixed.

Of course, if and when the Democrats do this, the Republicans will loudly protest that raising the taxes of the 'Job Creators' will hurt the economy during a period of high unemployment.

It is this predictable response that will provide Democrats with an excuse to review for the media the indisputable historical failure of the Republican Party's Economic Agenda to do what they said it would do.

Democrats need to make it clear that the entire package of Republican economic theory was put to the test during the Bush Administration in conditions that were ideally favorable for them and it still failed to deliver.





If this approach works, one will be able to tune into news broadcasts and hear:

"Are the Democrats right when they say that the Republican's tax-cutting economic philosophy is a demonstrated failure?  We took an in-depth look at this question and found that the evidence does, indeed, suggest that the Republican approach to job creation just doesn't work..."
Whether or not Republican economic policies work is no longer a 'matter of opinion' or open speculation.  It is now a proven historical fact that Republican Economic policies do not actually achieve what their proponents have long claimed they would achieve.


Although it wasn't depicted as such at the time, a Grand Experiment to demonstrate the effectiveness of Republican economic policies was actually conducted between 2001 and 2009.  They had everything going for them.  They controlled all branches of government, so there was nothing that the Democrats could do to thwart the execution of their grand design.

They not only cut the tax rates of the Top Two Percent of income-earners, but did so at a time when interest rates were at historical lows.  Add to this the fact that Bush Era Republicans also increased government spending using borrowed money.

In spite of all their efforts to 'stack the deck' in their favor, we now know the results of this Grand Experiment.

private-sector job growth Bush vs. Obama

THE central tenet of Republican economic mythology is the belief that cutting the tax rates of the wealthiest two percent of income-earners (the 'Job Creators') will stimulate vigorous economic growth through private-sector job creation.

That is really the ONLY way a tax cut could conceivably lead to an increase in tax revenue, if it directly led to more jobs being created (more jobs means more people paying taxes = more tax revenues collected).  That is how the tax cuts were supposed to 'pay for themselves.'  But it didn't happen.  The Grand Republican Tax Cut Experiment was tried, and it failed.

As can be seen in the graph above, no wondrous surge in private-sector job creation occurred after the Republicans cut the taxes of rich people.  Indeed, the growth in private-sector job creation was weaker following the Bush tax cuts than the growth we saw in that sector during the first four years of the Obama Administration, even though Obama gave no additional tax cut to the 'Job Creators.'

The Republicans threw hundreds of billions of dollars at millionaires and billionaires and did only as much 'governing' as they felt they absolute had to do (which in the case of the financial sector of the economy, was virtually nothing) and none of the good things they said would happen did happen.

So what did happen to all those hundreds of billions of dollars that were thrown at the 'Job Creators', if they were not used to create jobs?  Well, if we follow the money we can see precisely what happened to it.


Virtually all of the extra money that the Republicans gave to the Top Two Percent of income-earners was pumped into the asset markets within the FIRE Sector of the economy (i.e., the Finance, Insurance, and Real Estate markets).

We're talking about the stock market but also---especially---the real estate market.  Very few of the dollars thrown at these secondary markets ever ended up in the real economy.

No matter what financial investments the Two Percent happened to pour their tax-cut dollars into, it all eventually ended up in banks, which means of course that banks were suddenly awash with extra cash to lend (just as they had expected).

As one might also expect, this sudden glut of lendable dollars provided the typical profit-maximizing banker with a potent incentive to pour increasing amounts of this extra money into ever-riskier lending schemes opportunities.

Higher-risk-lending yields higher [interest] rates of return to banks = higher profit margins.  In this way, the Republican tax cuts for the wealthy gave bankers a perverse incentive to put the entire financial sector at risk.

Given the freedom-from-scrutiny that they expected from Republican politicians, bankers felt free to create some fantastical paper asset schemes, like bundled variable-risk loan packages, which enabled them to disseminate excessively risky 'assets' throughout the financial sector of the world economy.

Not to be outdone by their banking cousins, Insurance companies innovated some novel assets created out of nothing (well, effectively nothing, since they knew full well that there was never a chance that they would ever be able to pay off their obligations if real-estate inflation ever stopped in its tracks).

So the answer to the question...

"What happened to all those billions of dollars the Republicans borrowed in the name of the American taxpayer to give to the Job Creators?"
...is simply this:
The lion's share of it was wasted on an utterly useless Inflation Event that occurred almost exclusively within the Upper-Upper-Class.
In a runaway inflation event like this (too many dollars chasing too few luxury goods & financial assets), little or no actual improvement occurs in the standard-of-living of the ultra-rich.  No improvements, that is, that wouldn't have occurred anyway--at lower prices--even if the Republicans hadn't given them a big reduction in their tax rates.

Inflation for The Two Percent

This much we know with absolute certainty: without the big tax cuts the wealthy received from the Republicans, the big run-up in real-estate prices would never have occurred.  In other words, there would have been no real estate bubble.

If that money had remained on the federal government's balance sheet, fewer dollars would have been borrowed by the federal government and we would not now be talking about a 'Debt Crisis' and the possibility of possibly devastating government spending cuts.

It is now clear that the Republicans have been making their optimistic claims about tax cuts simply because they've really, really, really wanted to believe that it would work the magic that they predicted it would.  But now we know--and they know--that it was all just wishful thinking.


Contrary to everything the Republicans have been telling us for years, increasing taxes during a recession increases job creation when the increased tax revenue is collected from the richest of the rich (the biggest savers in the economy) and it is spent on true economic investments like infrastructure and human capital.

That is what the Balanced Budget Multiplier teaches students in Econ 101 classes, but for some unexplained reason, most economics professors forget about it as soon as they get to the chapters on Expansionary Fiscal Policy.

The reason why tax increases generate a net increase in GDP, is because money that would otherwise would have been removed from the economy by savers gets spent, instead, by the government.

That is why, when Paul Krugman decided to chart the economy's job-creation record following major tax hike/cuts over the past couple of decades, it ended up looking like this:

Now that we know for sure what doesn't work, it should be rather obvious that if we increase the tax obligations of the Top Two Percent and then use those billions to increase government spending on real economic investments, like infrastructure and human capitol, a net increase in the percentage of Americans working is guaranteed to happen.

(With a tax increase, the Super Wealthy may decrease some of their consumption--even though they could easily afford to buy whatever they want AND pay the higher tax bill--but that drop in consumption spending will be slight---since most of their 'extra' money is not spent on consumption anyway, but only on paper assets.  The government's increased spending on investment more than makes up for the drop in rich people's consumption spending.  Result: a net increase in aggregate spending, which is equivalent to saying GDP will increase.)

Democrats should not hesitate to point out that the Republicans have been wrong about almost everything they've claimed about the economy over the past few decades.  They need to insist that the media acknowledge the indisputable facts of recent history, that the Republicans failed utterly to create jobs with their now discredited "Tax-Cuts-For-The-Job-Creators!" theory.

Looking ahead to the 2014 mid-term Congressional elections, the Democrats have two years to drive home the message that The Republican Way was tried and it failed spectacularly.  Ridicule [of Republican economic myths] is the Prime Directive that Democrats need to follow if they want to become The Majority Party again.

If the Democrats cannot execute this fairly simple political strategy, then perhaps they really are 'in the wrong business.'

(Cross-posted at Nontrivial Pursuits)

Originally posted to James Kroeger on Mon Dec 03, 2012 at 06:01 PM PST.

Also republished by Community Spotlight.

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