11/10/2010 10:51 am ET Updated May 25, 2011

Calling the Republican Bluff

The Republicans have increased their power by advocating for lowering the deficit, lowering taxes and, ostensibly, increasing jobs. But there is no way they can deliver all three. They can't even deliver two of the three. Here's why:

1. Lowering taxes will increase the deficit. There is no way around this. Nonetheless, Obama and the Republicans agree, and Obama has consistently proposed since before he was elected, that the tax cuts due to expire on Dec. 31 should be extended for all families earning less than $250,000 annually. That means nearly all of us, 98 percent actually. But Obama wants to let the tax cuts expire for those families earning more than $250,000. The Republicans do not. If these tax cuts for the wealthy are extended, it will increase the deficit by an estimated $680 billion over the next ten years,. The Republicans want this not because it will repair the economy or create jobs for the middle class or relieve suffering; they want this because they are the party that stands for funneling more and more money to the wealthy at the expense of ordinary people. And although they claim to want to cut the deficit, they favor growing the deficit by this $680 billion gift to the already rich.

Since 1979, when Ronald Reagan was elected, there has been a steady and enormous shift of the share of national income from the middle class to the very rich -- the top 1 percent. Today, that income inequality is more skewed than it has been since the gilded age of the 1920s, before the Great Depression. And as pre-tax incomes of the very wealthy have soared, so their effective tax rates have dropped more than the tax rates on the middle class. These changes have not been due to the invisible hand of the so-called free market, but to explicit government policies since 1980. Extending the Bush tax cuts that would otherwise expire on Dec. 31 to the wealthiest class would only continue that trend.

Aside from the injustice of this approach -- why would middle-class voters support a policy that shifted more of their tax-dollars to the very rich? -- this policy, if enacted, would substantially increase the deficit the Republicans say they want to reduce!

2. If Republican tax policies will enrich the rich and increase the deficit, how then do the Republicans propose to cut this larger deficit? They say they will do it by reduced government spending. But they never say precisely what government spending they propose to reduce, and by what amounts exactly. This is because they can't.

Approximately 85 percent of the entire federal budget goes for mandatory programs or the military. There isn't enough discretionary fat in the budget, outside of these programs, to make a substantial dent in the deficit.

Four categories of government expenditures account for the great majority of federal spending: interest on what we owe, which is to say, interest on the deficit; the military; Social Security; and Medicare. The deficit -- which has now reached about $1.3 trillion and which will go higher if the Republicans continue tax cuts for the rich -- cannot significantly be reduced without substantial cuts in one or more of these four categories. And there's the rub.

We obviously can't significantly reduce the interest we are paying on the deficit until the deficit is substantially reduced, so that's out for now. As for discretionary programs, as far as I am aware, no Republican favors substantial cuts in military expenditures, and not many Democrats do either. So that leaves Social Security and Medicare. Do you want these programs destroyed (trimming won't be enough)? I didn't think so. The last time George W. Bush proposed eliminating Social Security prospectively and replacing it with private investment accounts, which would be a bonanza for investment banks while endangering the security of the elderly retired, he got walloped by the public's reaction and withdrew his proposal. Certainly, the 23 percent of the electorate who are over 65, many of whom voted Republican in the last election, did not think they were voting to cut Social Security, or for that matter Medicare, which pays for most of their medical expenses. So most Republicans today will tell you if you ask them that they are against major cuts in Social Security and Medicare.

But without such major cuts, the deficit cannot substantially be reduced without increasing taxes, at least on the very wealthy. And Republicans don't want to increase taxes, especially not for the very wealthy; to the contrary, they want to decrease such taxes, thus creating even more wealth inequality, and growing the deficit!

So their platform proposals make no sense; they cannot work, and they won't be implemented. Republican campaign promises, taken together, will turn out to be so much snake-oil.

3. And then there's the matter of jobs, and the 15 million people out of work, nearly 10 percent of the workforce. That is the most crucial economic problem facing us, and it was voter anger over that issue, more than anything else, that fueled the recent electoral "throw the bums out" dynamic. The president and the Democrats in general offered no coherent vision, program or remedy to address this problem; the Republicans did, but their vision is fraudulent, as will become increasingly apparent.

There are two ways to create lots of jobs:

a) The private sector -- privately-owned companies -- can spend more to expand their businesses, which would require more employees. In order to do this, they need either to spend the cash they have (many companies have accumulated very large cash reserves) or borrow it to finance expansion. But right now, and for the foreseeable future, businesses that have a lot of cash are hoarding it because the economic climate remains uncertain, or using it to buy back their own stock, thus driving up the price of their shares. And they either won't borrow more money for the same reason, or can't because banks and other lenders are reluctant to extend credit, even after being bailed out to do so. Banks are once again paying huge bonuses to themselves, but they're not extending huge amounts of credit.

In New York City, to cite only one example, the new construction industry is at a standstill, and likely to remain so for some time, because builders cannot borrow enough to build, and cannot in any case justify the high expense of building by the fading prospect of high returns in a depressed economy. (If more luxury residential and office towers are built, who exactly will occupy them?)

So the likelihood that the private sector will, anytime soon, spend enough to expand the number of jobs sufficiently to put a major dent in the unemployment rate is vanishingly small. When a newly-elected senator like Rand Paul of Kentucky proposes to let the private sector solve the unemployment problem, he is smoking from the same pipe Herbert Hoover smoked in 1930. He does not know what he is talking about. What he is proposing can't happen, and it won't happen.

(Of course, many who share Rand Paul's belief will tell you, if they are honest, that if the Great Recession gets bad enough, that is, if unemployment persists and gets worse, and everything becomes cheap enough, then at some point the private sector will swoop in and re-enter the job-creation market. But even if that is possible, it would require the worsening of the unemployment depression plaguing America, considerably and for a long time. Republicans subscribing to this view may be willing to have middle-class Americans endure such suffering, but I doubt that most such Americans share that willingness.)

b) So if the private sector can't or won't expand anytime soon and create lots of new jobs, the only alternative for spending to expand the number of jobs is the public sector, which is to say the government, state and federal. Certainly, there is much important, even crucial work to be done: new and repaired bridges, tunnels and roads; an efficient, high-speed railway system; new construction to repair and replace ancient water pipe and sewage systems, many of which are crumbling and on the precipice of disaster -- in a word, infrastructure, public infrastructure, like the Interstate Highway system President Eisenhower initiated in the fifties. This is work that needs to be done, and would put substantial numbers of people to work, providing lots of new jobs.

But these are precisely the kinds of expenditures that state governments cannot afford, and where they have started them, they are canceling them. For example, the new Republican governor of New Jersey, Chris Christie, not once but twice has now canceled the planned railway tunnel beneath the Hudson River connecting New York and New Jersey. States everywhere are cutting their budgets, further reducing employment, not expanding it. And most of the new Republican governors just elected have resolved to continue such austerity. So if the private sector isn't doing it, and state governments can't do it, who can create a sufficient number of new jobs? There is only one alternative left: the federal government.

At a time like this, the federal government must be the job-creator of last resort, as it was between 1932-45, because there is no other alternative to continued and persistent high unemployment, and the misery it causes so many of us.

There are two ways to pay for this: by higher taxes or by increased borrowing (from China and others willing to buy our Treasury bonds). Increased borrowing will, for awhile, increase our national deficit. But higher taxes right now (except for the very wealthy, who could easily absorb higher taxes, and should) will crush middle-class people who are already suffering from high unemployment, housing foreclosures and the like. So there is no way out of our dilemma except to have the federal government fund enormous public works and other programs that will require a massive number of new jobs. But that solution runs right up against the mistaken consensus that reducing the deficit should be a high, if not the highest, priority. If that continues to be a priority, unemployment will rise even more. There is no way around this choice. Either the deficit grows or unemployment grows. For those without jobs, the choice should be clear. The federal government must, in the short term, increase the deficit by massive job-creating public works expenditures, partially off-setting those expenditures by restoring the traditional taxes on the wealthy by letting the Bush tax cuts for them expire as planned on Dec. 31, while extending the tax cuts for 98 percent of individuals and families.

But would such expenditures actually create lots of jobs and significantly reduce unemployment? Yes, if the expenditures are large and ambitious enough. People will argue that the prior "stimulus" program failed. But the reason it failed to make a noticeable dent in the unemployment rate (although it did keep joblessness from going even higher) is not that the idea was wrong, but that it wasn't large enough, especially since its gains were largely offset by expenditure cutbacks at the state level. If we mean to get out of this fix, and end the suffering of the middle class, much larger expenditures by the federal government to create jobs will be required.

But can we afford to increase the national deficit even more? Yes, we've done it before and we can do it again. Even in the midst of the Depression that had not yet ended, when we felt that our survival was at stake after Pearl Harbor was attacked in 1941, we did not hesitate to increase the deficit very substantially in order to respond. In fact, WWII increased the national deficit, as a percentage of Gross National Product, by way more than it is today. But without that increased deficit, without the federal expenditures we incurred to finance the war effort, we could not have survived. And that huge deficit also put millions to work, effectively ending the Great Depression. Even after the war, the deficit was increased to fund the G.I. Bill, housing subsidies, the Marshall Plan and the Interstate Highway system. Most of that huge deficit was erased by economic growth during the period of prosperity that began in 1946. The short term but huge increase in the national deficit turned out to be precisely the stimulus the economy needed.

Today, we do not face the same kind of war for survival that we faced after Pearl Harbor. But we do face a war for survival of our way of life, a fight to maintain the promise of America for the middle class, and to assure the prospect of a better life for our children and grandchildren. That fight must be funded with the same resolve that allowed us to fund WW II, and, yes, by the same faith in the promise and resilience of America, and our ability to rebuild our country with paying jobs for people who need them.

It will not happen if we follow the Republican pipe-dream of enriching the rich, cutting federal and state expenditures, reducing the deficit and letting more and more Americans suffer joblessness while they wait for the banks and the captains of industry to get back into the job market -- after the rest of us have suffered enough to make it profitable for them.

Given what the Republicans say they want to do, they have no capacity to lead us out of this dilemma, no matter how many elections they win with their campaigns of disinformation. President Obama should not be reaching out to them, he should be charting a different path and articulating a different vision. If he will not lead us along a different path at this critical moment, and the Republicans can't, then who will?