Republicans have argued for the last four years that cutting spending is the panacea that will spark a rapid recovery in the American economy, and it has stuck to that line even as the same policies have failed across Europe. Those policies will lead to failure in the United States too, according to a Congressional Budget Office report that found that scheduled spending cuts mixed with scheduled tax increases at the end of this year would likely lead our economy into a second recession.
The GOP and certain media outlets have already begun circulating the report as evidence that the tax hikes are primarily responsible for the potential economic downturn. But even though the budgetary impact of ending the Bush tax cuts is much larger than the budgetary impact of the scheduled spending cuts, adding the CBO’s economic multiplier effects shows that the negative economic impact of the spending cuts is larger than that of ending the tax cuts. That is to say, cutting spending as scheduled in January will have hurt the economy more than ending the Bush tax cuts, as this chart from the Committee for a Responsible Federal Budget shows:
And while the GOP has argued that tax cuts for the rich will boost economic growth, the CBO report (and a decade of evidence) found the opposite. Instead, letting tax cuts for the rich expire would have a negligible impact on growth. President Obama’s budget allows the Bush tax cuts for the wealthy to expire, and yet the CBO found that short-term growth under that plan would exceed short-term growth under the current scenario.
The major negative impact on the tax side instead comes from an end to the Bush tax cuts for the middle class and an end to the payroll tax cut extension. There is bipartisan agreement on Capitol Hill around extending the tax cuts for the middle class — Senate Majority Leader Harry Reid (D-NV), in fact, has said it could pass tomorrow if the GOP didn’t insist on tying it to tax cuts for the rich. It was Republicans, meanwhile, who sparked opposition to the payroll tax cut ahead of its expiration this year.
Despite this evidence, the GOP is pursuing these priorities in exactly the reverse order, prioritizing massive, reckless spending cuts and holding tax cuts for the middle class hostage in an attempt to preserve tax cuts for the rich, even though those cuts have little or no impact on economic growth. (A recent analysis of the House GOP’s budget, for instance, found that it would kill 4.1 million jobs over the next two years.)
European countries that pursued massive fiscal contraction over a short period of time killed economic growth and pushed their countries into double-dip recessions. This CBO report proves that the same could happen in the United States, adding to the evidence that we can’t possibly cut our way to growth.