Why Boehner Is Just Plain Wrong On Economics

You almost have to feel sorry for John Boehner.

First he has a bad election, the sort that had to have left him feeling like a kid who got coal instead of candy for Christmas. Then, his first week back saw him not focusing on pursuing his strategic agenda for the House, not working with a victorious President Romney and a nice, friendly Republican Senate but, instead, scrambling to respond to the Petraeus scandal. The abrupt fall from grace of one of conservative America’s chief idols (and, apparently, bright shining hopes as a 2016 Republican presidential candidate) couldn’t have been at the top of his list of things he wanted to be doing.

And now, he finds himself caught in a high-stakes poker game with the guy he vowed to make a one-term president. With a losing hand. Worse: a hand that everyone knows is a losing one. And he can’t fold, because his own allies will eat him for lunch, and he can’t bluff, because President Obama knows exactly what Boehner has (or doesn’t have) up his sleeve.

Really, the guy has had a bad month.

Don’t feel too much compassion for him, though – because the thing is, Boehner isn’t just in a bad tactical position on the “fiscal cliff,” he’s also on untenable economic ground. Defending tax cuts for the rich because raising rates on the top 2% would, supposedly, be bad for the economy isn’t just ethically squishy, it’s also just plain bad economics.

There’s simply no compelling evidence that reducing tax rates on the wealthy has any significant impact on economic performance – certainly not commensurate with the cost. Even as far back as 1980, George H. W. Bush called out the flaws in Reagan’s cockamamie “cutting taxes increases revenue” theory. Remember “voodoo economics”? (We sometimes forget that the Bushes were against supply-side theory before they were for it.) And let’s not forget the 2012 study by the Congressional Research Service – Congress’ own non-partisan think tank – that found that:

“There is little evidence over the past 65 years that tax cuts for the highest earners are associated with savings, investment or productivity growth.”

Indeed, CRS found that there is a statistical correlation between higher taxes for the rich and increased economic growth. Although cutting top-tier tax rates was found to have some impact on investment and capital gains – the “job creator” effect that Republicans are always going on about – the correlation between reducing tax rates on the wealthy and investing and capital gains was “not statistically significant.”

Congressional Republicans, of course, tried to squash the report. Can’t have mere fact interfering with truthiness, after all. Billionaires all over the country might stop sending fat checks to Republican candidates if they let the word get out that making the wealthy even wealthier is bad economic policy, as well as atrocious social policy.

There’s also this to consider: an interesting concept called the “fiscal multiplier effect.” The basic idea is that different public policy options – whether increased spending or tax reductions – tend to have greater or lesser “multiplier effects” on the economy as a whole. So, for example, when government funds, say, a road-building project for, let’s say, a million dollars, that money doesn’t simply disappear down a black hole (whatever conservative talking heads might want us to think). A contractor is hired, he or she in turn then goes out and pays employees to do the work; buys asphalt, rents or buys equipment, and so on. In turn, those employees and suppliers spend their paychecks on goods and services, providing income for shops and businesses, banks and grocery stores, who then in turn pass it along.

Similarly, cutting taxes puts more money in the hands of taxpayers, who then have the option of spending it, saving it, investing it, paying down debt… you get the idea.

The thing is, when it comes to government fiscal policy, not all policy options are equal, when it comes to their multiplier effect. Moody’s, the multinational debt rating agency, performed a study in 2008 which looked at the fiscal multipliers for various policy options that Congress could implement to try to stimulate the U.S. economy. In testimony before the U.S. House Committee on Small Business, on July 24, 2008, Mark Zandi, Moody’s chief economist, noted that the greatest “bang for the buck” came from direct government spending – particularly on Food Stamps, extending unemployment insurance, and increased infrastructure spending. For every dollar the government spends on Food Stamps, for example, the economy receives $1.73 in benefit.

The worst payback, in terms of benefit to the economy as a whole (including job growth and impact on GDP) came from permanent tax cuts. Making dividend and capital gains tax cuts permanent – a favorite conservative cause, and one which they claim helps to create jobs and strengthen the economy – actually costs more in lost government revenue than it produces in economic activity, returning only $0.37 for every dollar of tax relief. Making the Bush income tax cuts permanent is even worse, at $0.29 for every dollar it costs the government.

It’s true that we need to be worrying about the deficit. Spending so much more than we’re taking in is, indeed, a serious problem over the long term (though not so much in the short term, contrary to the furor we’re hearing from the right). But contrary to what we’re being told, what we have is not a spending problem – government spending has been the one thing holding the economy relatively stable while the private sector recovers from the long recession. No, what we have is a revenue problem.

And those tax cuts we showered upon the rich? Well, as it turns out, they just don’t pay off. Raising taxes so we can continue to fund sensible public-sector investments in the American economy – eduction, infrastructure, job training, basic research, and so on – as well as meeting our obligations to seniors and the poor (who, remember, spend that money with a high “multiplier effect”) is not only the moral thing to do… it’s the smart thing to do.

Now. How many of you think John Boehner doesn’t know all this? Hold up your hands.