July 20, 2012
In 2011, congressional Republicans agreed to automatic spending cuts of $1.2 trillion beginning on January 1, 2013, divided equally between defense and domestic programs over 10 years, in return for agreeing to raise the federal debt limit. Now some are having second thoughts that could doom the tax pledge that has paralyzed deficit reduction efforts for two years.
At the time they made the deal, Republicans probably thought that last summer’s “super committee” would have no difficulty coming up with alternate deficit reduction measures to meet the $1.2 trillion target. Ultimately, however, the committee failed because Republicans adamantly opposed raising taxes by so much as one penny.
After the failure of the super committee, I thought Republicans would just suck it up and accept the $600 billion in defense cuts. Since the cuts are spread over many years, I didn’t think this would have any meaningful impact on our defense capabilities and could be handled relatively easily.
Moreover, Republican Tea Party members have long said that everything should be on the table when it comes to cutting spending and the deficit. And since national defense accounts for 30 percent of federal spending it didn’t seem remotely realistic to me to leave it completely off the table.
Now, suddenly, many Republicans appear to be seriously panicked about the prospect of a defense sequester, so much so that some are now saying that tax increases may be preferable. At a hearing on Wednesday before the House Armed Services Committee, the CEOs of defense contractors Lockheed Martin and Pratt & Whitney both said that higher taxes were preferable to automatic spending cuts and some GOP members of the committee agreed.
Fair-weather deficit hawks like the Wall Street Journal editorial page are attempting to explain why defense should be exempt from budget cuts and spending for the poor slashed even more to reduce the debt, while continuing to insist that taxes must not be increased. But the illogic of this position is wearing thin now that real defense cuts are in sight.
An important factor putting the defense sequester on the table now is an obscure law called the Worker Adjustment and Retraining Notification Act, which requires companies anticipating mass layoffs to give workers at least 60 days advance notice. That means the layoff notices for defense contractors affected by the sequester on January 1 will be sent out no later than November 2, just 5 days before the election.
There is also evidence that the stocks of defense contractors are suffering as investors expect a big hit to earnings from layoffs related to the sequester.
Belatedly, some conservatives have now noticed that cuts in federal spending cost jobs. They are trumpeting a study by the Aerospace Industries Association predicting the loss of 2 million jobs if the defense sequester takes effect as scheduled. This includes not only jobs directly lost in the defense industry, but those indirectly lost as laid off workers cut back their spending for goods and services.
This is important because the Republican Party line since the beginning of the Obama administration has been that government spending is not stimulative and does not create jobs. That’s why every Republican voted against the $780 billion stimulus package in February 2009. Indeed, many Republicans, such as House Budget Committee chairman Paul Ryan, have argued that in fact spending cuts are stimulative.
It stands to reason that if cuts in defense spending cost jobs, then cuts in nondefense spending also cost jobs. And if spending cuts cost jobs, then spending increases must be able to create them.
The obvious way out of this dilemma is simple: raise taxes instead. Achieve the same amount of deficit reduction but by through higher revenues rather than defense spending cuts. Given that federal revenues are now just 15.8 percent of the gross domestic product, compared with a postwar average of about 18.5 percent, it’s obvious that revenues could rise a lot without jeopardizing economic growth.
But Republicans are boxed in by a pledge that virtually all of them have signed promising to never raise taxes. (The pledge doesn’t actually say that, but this is how it is commonly interpreted.) Very well financed groups such as the Club for Growth enforce the pledge vigorously, funding insurgent primary campaigns against any Republican who violates the pledge.
Furthermore, conservative economists such as Veronique de Rugy of the Mercatus Center continue to insist that tax increases are worthless for deficit reduction. Billionaire Charles Koch, who is a major funder of Republican political action groups, is a member of the Mercatus board.
Of course, the experience of the 1990s shows the conservative view to be complete nonsense. Contrary to Republican predictions that the 1993 tax increase would tank the economy and raise spending, thus providing no reduction in the deficit, the economy boomed and the deficit disappeared, giving the nation budget surpluses until Republican tax cuts dissipated them.
In any case, Republicans are now faced with a particular problem regarding defense cuts. The option of simply dumping another $600 billion in spending cuts on the poor is not an option as long as Democrats control the Senate and the White House. If nothing is done, the sequester will take effect automatically because it is already part of the law. And even if Mitt Romney becomes president, he won’t take office until 20 days after the sequester has begun and layoffs have already started.
Therefore, Republicans are between the rock of defense cuts that they view as unpalatable and the tax pledge hard place. There is no doubt that Democrats would agree to a tax increase to offset the defense sequester, but would oppose any other alternative except, perhaps, putting off the entire sequester, including domestic spending cuts, for a year. It’s doubtful that the GOP’s Tea Party wing would support that.
Republicans are not yet ready to embrace a tax increase even to prevent defense cuts. But it is clear that they are ultimately going to have to choose one or the other.