01/31/2013 01:56 pm ET Updated Apr 02, 2013

The Verdict Is In: GOP Austerity Proposals Are Toxic for Our Economy

There are two major pillars of Republican economic ideology.

First is "trickle down" economics -- the notion that if we allow the wealthiest two percent to accumulate more and more of the fruits of our economy, the benefits will "trickle down" to everyone else.

The second is fiscal austerity -- the idea that the best response to an economic downturn is to "tighten our belts" and slash critical government spending that we "no longer can afford."

Both of these pillars were created to justify the transfer of more and more income to the wealthy few and to provide a rationale for keeping their taxes as low as possible. But even recognizing the GOP's motivation in proposing them, ordinary voters might be tempted to support them if they actually produced economic growth and good-paying jobs for everyday Americans. They don't. And anyone who tries to make a case to the contrary must ignore the last century of economic history.

George Bush's great experiment in "trickle down" economics produced irrefutable evidence of failure in 2008 when the economy collapsed and all of those tax breaks for the wealthy had produced exactly zero net private sector jobs over almost an entire decade -- the worst job creation rate since the Great Depression. America has been recovering from that disaster ever since.

Now we have fresh evidence that the medicine of "austerity" is about as good at curing an economic downturn as arsenic is at curing a cold.

New numbers out this week showed the Gross Domestic Product actually shrank in the last quarter of 2012. It shrank despite the fact that consumer spending increased, businesses increased investment in new equipment and software, and the housing market continued to improve.

But those increases were offset by a major decline in federal spending, so the economy actually shrunk by .1 percent. Why did federal spending drop -- even before the so-called "fiscal cliff"? One reason appears to be that federal agencies held back on spending in anticipation of the potential "sequester."

Whatever the reason, it doesn't take a rocket scientist to understand that if government spending drops, there will be less overall demand in the economy and fewer goods and services will be produced. But Republicans simply won't admit that is true.

According to the Washington Post, when asked about the implications of the fact that GDP had contracted because Federal spending had dropped, Republican Senator John Cornyn (R-Tex) said that the idea that economic growth relies on government spending was a "Keynesian pipe dream." He argued that the best thing government could do for the economy is "rein in the deficit."

"Only the private sector can lead a robust, sustained recovery," said a spokesperson for House Budget Committee Chair, Paul Ryan (R-Wis).

These statements are just plain stupid. It's as if these people haven't taken Economics 101.

The Republicans' brothers in arms in Britain -- the Tories -- convinced the voters there to buy this same bill of goods several years ago. The result: while the U.S. has had a slow but sustained recovery, Britain had a double dip recession.

Of course "budget hawks" argue that federal spending that relies upon deficits is unsustainable. And that is true if the percentage of our total economic output represented by federal deficits grew over time. Right now, of course, it has actually begun to drop. And it is not at all true that reductions in federal spending help the economy in the short term -- just the opposite.

Deficits are not a measure of our economic well-being. In fact, there is only one real measure of economic well-being. That is the sum of the goods and services produced by the economy -- by the labor of our people. If fewer people are working to produce useful goods and services, we are less well off -- if more people are more productive at producing more useful goods and services, we are better off -- it's that simple. The best approximation of that sum of the total goods and services produced by our economy per person is per capita Gross Domestic Product (GDP).

According to numbers assembled by the Center for Economic and Policy Research, the economy lost about 1.4 trillion dollars in annual demand when the economy collapsed. That reduced the total number of people working to produce goods and services by an enormous amount. As a result, right after the Great Recession hit, GDP per capita dropped. It has been recovering ever since.

The Federal Stimulus bill helped offset that reduced demand, but was much too small -- generating only a net of $250 billion or so in new annual demand. Economic spending by government is one of the only ways economies that collapse -- especially as a result of a financial meltdown -- can reboot. Federal spending over the last several years was not the problem -- it was the medicine we needed to cure the ailing economy and put people back to work creating useful goods and services -- and put money in the pockets of workers who could then turn around and spend it on more goods and services produced by the private sector.

Deficits are not our biggest economic problem. Our economic problem is putting everyone back to work creating useful goods and services.

In fact, Democrat Bill Clinton left his Republican predecessor, George Bush, budget surpluses as far as the eye could see. What caused the explosion of Federal debt were the Bush tax cuts, and two unpaid-for wars. But even those deficits were dropping as a percent of GDP until the economy collapsed. In fact, the Congressional Budget Office estimated that they would continue to drop and turn into a surplus by 2012 -- had it not been for the Bush economic collapse that lead to the Great Recession. The recession caused tax revenue to plummet, and expenditures for Federal programs like unemployment to increase. That is what caused deficits to spike to from below 2 percent of GDP in 2007 to 10 percent in 2009.

That's why the best therapy for the federal deficit is increasing taxes on the wealthy and jump-starting economic growth -- not austerity.

Short-term deficits become problems for an economy if a country can't get anyone to refinance its debt. Countries like Greece and Spain ran into that problem. And in the case of Spain, the problem had more to do with the structure of the European monetary union than high levels of government debt, since Spain had a relatively low debt-to-GDP ratio.

But the U.S. doesn't have any trouble borrowing money at low rates, since U.S. Treasury bills are considered the safest investment in the world. T-Bill rates remain very low.

And the notion that the United State can "no longer afford" current levels of spending on Social Security, Medicare and Medicaid are simply preposterous.

The United States remains the richest country on earth.

Real Gross Domestic Product per capita -- the best measure of the sum of the goods and services produced by our economy per person -- increased over eight times between 1900 and 2008. That means the standard of living of the average American today is over eight times higher than it was in 1900. Average Americans today consume eight times more goods and services than they did at the beginning of the last century. We are eight times wealthier today than we were then.

GDP per capita increased six times since Social Security was passed in 1935. It has increased 2.3 times since Medicare was passed in 1965.

It is simply bogus to say that we could afford Social Security and Medicare when they were passed, and can no longer afford them today.

Of course it is true that the cost of medical care has increased faster than inflation over those years. But that is the case for all medical care in our economy -- not simply Medicare or Medicaid. In fact, Medicare and Medicaid are the cheapest means of delivering health care in our economy.

We spend 40 percent more on health care per person than any other nation. That is not because we need more health care. It is because the system of private insurance is incredibly inefficient at delivering care -- and by the way, we are still only 37th in the world in health care outcomes.

The solution is not to cut Medicare. It is to extend Medicare coverage to all Americans and adopt a much more efficient system like the one that our neighbors in Canada enjoy today. At the very least, Medicare should be available as a public insurance option for everyone in America to purchase on the new ObamaCare exchanges.

Finally, the so-called "demographic time-bomb" that is supposed to sink Social Security and Medicare is also a straw man.

According to the Bureau of Labor Statistics, productivity per hour worked increased at an annual rate of 2.1 percent from 1900 to 2000. From 2000 to 2007 it increased 2.5 percent. It even increased at rate of 1.8 percent per year in the period 2007 to 2011, which included the Great Recession.

The Center for Economic and Policy Research calculates that the increasing percentage of older Americans in our economy will reduce our living standards by about 7 percent from 2012 to 2035. That's a lot. But even with a 1 percent increase in productivity per hour, productivity growth swamps this demographic effect, increasing living standards around 27 percent over the same period. An increase of 1.5 percent in productivity increases living standards by almost 40 percent and an increase of 2 percent --- the average for the last century -- increases living standards by almost 60 percent.

The only reason we couldn't afford to pay for Social Security and the costs of other earned benefits of retirement, is if the top two percent continue to pocket all of the increases in per capita growth in GDP the way they have for the last twenty years. And when it comes to Social Security, there is an easy way to prevent that: eliminate the current $110,000 cap on earnings that are taxed for Social Security -- make the wealthy pay their fair share.

So next time Congressman Paul Ryan or Fox's Sean Hannity starts pontificating about the country's crushing debt burden, or the "unsustainability of our costly entitlement programs" or the notion that we "can't afford" to pay people a decent pension, you might want to ask if they slept through economics class -- or maybe it's just that they majored in writing fiction.

Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on He is a partner in Democracy Partners and a Senior Strategist for Americans United for Change. Follow him on Twitter @rbcreamer.

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