Last Friday was our economic Groundhog Day. The horrendous job numbers that came out prove that we're stuck in the same old script of bad policy and bad economics that got us into the mess we are in.
Remember the rallying cry from Republicans and business leaders last December? If you extend the Bush tax cuts for the wealthy, then we will open the floodgates to hiring and the $2 trillion in retained earnings—cash—that we're sitting on will pour into the economy. Well, it hasn't happened. The gears of the job creation engines have ground to a halt. The paltry 36,000 jobs created in January (50,000 in the private sector—government shrank by 14,000 jobs) are a harsh reminder that we're stuck. (Remember, just to accommodate population growth, we need 150,000 jobs every month just to break even.)
And make no mistake: Job creation is the most critical measure of the long-term health of the economy—not corporate profits, not GDP.
Not that anybody should be surprised that the Bush tax cut extension is failing. Let's take a quick walk through some recent economic history. In 1993 President Clinton took huge political risk—and suffered serious consequences in the 1994 midterm elections—when he engineered a tax increase for those with incomes above $200,000. At the time, Newt Gingrich said that "it would kill the current recovery and put us back in a recession." Another senior Republican member of the House, Rep. Chris Cox—who went on to serve as one of the worst SEC chairs in history—said "it "will kill jobs, kill business, and yes, kill even the higher tax revenues that these suicidal tax-increasers hope to gain."
We all know what happened: seven years of phenomenal growth, 23 million jobs created, and surging tax revenues that left incoming President George W. Bush with a budget surplus in 2001. The unemployment rate dropped from 6.6 percent in January 1994 to 4.2 percent in January 2001.
Faced with that glorious economic situation, what did Bush's economic team call for? A tax cut that they claimed would stimulate job growth. Instead, the Bush era was an economic catastrophe: The unemployment rate rose from 5.7 percent in January 2002 to 7.8 percent and climbing when Bush left office in January 2009. Those tax cuts also took the federal budget deep into the red.
Why restate these well-known episodes? Because we keep reliving history, and ignoring the evidence from it. The Republicans claim again their tax cuts will create jobs, even though history shows us no such thing. The harsh January job numbers are just the first data point in what will become even more painfully obvious over the next several months. Whatever job growth we get will be thanks to fiscal stimulus—the demand side push that traditional Keynesian economics calls for—not the impact of the tax cuts.
Meanwhile the tax cuts are adding to the already enormous deficit. The implications of that were clear in President Obama's State of the Union Speech: After soaring rhetoric about "winning the future," the speech then took a decidedly more somber turn, focusing on the overwhelming need to cut domestic spending in order to balance the budget. The investments the president had just said were so necessary suddenly became mere illusory wisps now that the revenue to fund them had been given away in the tax cut extension.
President Obama might deny this, but it's apparent that the Republican agenda is triumphant: massive tax cuts for those at the top, and a freeze on domestic spending. And oh, by the way, the promised jobs are nowhere to be seen.
But perhaps a happier ending is coming. After a few more months of lagging job growth, the president should say this: We did an experiment; we gave the wealthy the tax cuts they requested, and gave business the tax cuts it said it needed, yet we got no jobs, merely a huge increase in the deficit. So now, instead of embracing the Bowles-Simpson deficit reduction plan—which would save about $3.9 trillion on the deficit over a decade—or any other significant plan for emasculating domestic investment, I am going to simply let the Bush tax cuts expire in their entirety in two years. That will raise about $3.9 trillion dollars—an astonishing coincidence, and permit us to pay for the domestic spending we need to compete in a global economy.
After all, the rates after the expiration of the Bush tax cuts will merely revert to what they were under President Clinton, when we had both a booming job market and budget surpluses.