Why the GOP Balanced Budget Plan Is a Bad Idea
Business + Economy

Why the GOP Balanced Budget Plan Is a Bad Idea

iStockphoto/The Fiscal Times

President Obama’s top economic adviser Alan Krueger suggested Tuesday that Republicans have misconstrued the purpose of the federal budget.

GOP lawmakers have told voters for the past three years that balancing the budget should be the country’s top priority—basically the end game of all federal policy. This rationale drove their resistance to raising the debt ceiling in 2011 and desire to revamp programs like Medicare and Medicaid that are projected to drown the government in red ink.

The chairman of the Council of Economic Advisers would agree that the government’s balance sheet needs to be sustainable. But Krueger—an expert on labor economics on leave from Princeton University—explained in a speech that the budget is actually a tool for achieving other economic objectives.

“A critical point—one which others have made, but frequently gets lost in the public conversation over fiscal policy—is that the federal budget is not an end in itself,” Krueger said. “The federal budget is simply the means through which we, as a nation, seek to achieve our economic objectives.”

The major objective he listed and constantly repeated during the speech was creating middle class jobs. This is a slightly different conception of the budget than what Republicans have articulated, and it helps to frame the political divide as the country goes through sequestration cuts, copes with the need to extend a budgetary stop-gap this month, and debates another debt ceiling increase in May.

Krueger’s address to the National Association for Business Economics has the premise that government spending on education and infrastructure help nourish the kind of commerce that creates employment with solid wages. The White House rationale for further increasing revenues—after raising top-tier rates earlier this year—stems from this belief.

“If we follow our ‘North Star’,” he said in reference to an Obama speech, “of growing the economy and the middle class, we will end up with a balanced plan that supports the economy in the near term while we take steps to address our long-term budget deficit. That is the ultimate test that we must apply to government policy.”

In the optimism usual for Washington, Krueger envisions this goal as a source of unity, when it has manifested itself as cause for division.

Republicans also position themselves as pro-middle class, saying that any expansion depends on a hands-off government that is smaller. This was the central thrust of Florida Sen. Marco Rubio’s response to Obama’s State of the Union address.

If the problem is spending, then the solution is obviously to spend less, with the expectation that private capital will then flow to the middle class. But the private sector has shown little inclination to give workers generous raises.

The New York Times noted this week that corporate profits as a share of national income stood at its highest share since 1950, while employee wages had fallen to 61.7 percent of national income, almost its lowest point since 1966.

Likewise, the administration talks about the need to foster jobs with decent wages, but investments in education and STEM courses seldom pay immediate dividends. And short-term relief is no longer on the table with the expiration of the two-year payroll tax holiday and an administration that has been willing to cut the discretionary spending it claims to be protecting. Without the  temporary stimulus of the payroll tax holiday, most Americans will see theirpaychecks shrink by 2 percent—about $1,000—this year.