Why Have Politicians Neglected the Unemployed?

Why Have Politicians Neglected the Unemployed?

REUTERS/Shannon Stapleton

There was a time when Republicans believed that both monetary and fiscal policy had a role to play in recessions, monetary policy in particular. Milton Friedman, for example, believed the Fed should intervene to stabilize the economy during a financial crisis. Today, however, Republicans do not believe that the Fed and Treasury should bail out banks even in a severe crisis. Saving banks, no matter how big, creates the incentive to take on too much risk and delays the necessary cleansing that needs to occur before we can return to economic health. Thus, no banks should be saved even if it means tolerating high levels of unemployment.

When it comes to interest rate policy from the Federal Reserve, Republicans argue that unemployment should not matter either. Many Republicans would like to see the Fed eliminated altogether, but if that’s not possible then monetary policymakers should worry about one thing and one thing only, inflation.

Even if unemployment is very high, any threat of inflation whatsoever must be met with interest rate increases. Inflation transfers money from those who lend money – the wealthy supporters of policymakers in particular – to borrowers. That could help the economy in a deep recession, but since the wealthy have to give something up the GOP will oppose it no matter how much it might help struggling households.

Republicans also believe that less regulation is better than more. Even now Republicans argue that the market is the best regulator, an indication that either those making the arguments have learned nothing from the crisis or, as is more likely, that the arguments serve the interests of wealthy supporters. 

Republicans also tell us that fiscal policy doesn’t work. If widespread bank failure leads to high levels of unemployment – as it does historically – there is nothing that fiscal authorities can do to help. Yes, times will be difficult for many households, but government intervention only slows the recovery and ends up making things worse. Tax cuts are an exception, but the exception doesn’t always apply. For example, Republicans had to be forced to extend the payroll tax cut in Obama’s stimulus package, but there always seems to be an argument for tax cuts for the wealthy.
In short, Republicans have become the “do absolutely nothing to help the economy in a recession” party. Actually, it’s worse than that. They’ve become the “use bogus arguments to reduce the size of government during a recession even if it means higher unemployment” party. There’s considerable evidence that reducing government debt during a recession through spending cuts or tax increases is harmful.

Despite this evidence, Republicans latched onto the idea that austerity – spending cuts – would generate increased confidence in the future causing consumption and investment to increase enough to more than offset the spending cuts. In the end, a cut in demand magically becomes expansionary. History should have provided adequate warning that this would backfire, but even when it became clear that this policy was failing miserably in Europe Republicans continued to promote it because it was consistent with their ideological desire for a smaller government.
The claim that keeping the deficit as small as possible was the key to recovery – the opposite of a Keynesian prescription – made it impossible to give the economy the help that it needed to recover. Some help was provided early in the recession, but much more was called for and overall the federal stimulus package did little more than offset severe cuts at the state and local level. The GOP’s refusal to endorse sufficient stimulus probably saved the wealthy from a higher taxes in the future, but the cost in terms of extending the struggles of unemployed households was very high.

Republicans have not always been so opposed to government action. Most people forget that the financial bailout was initiated by the Bush administration, and that the first round of fiscal policy in response to the crisis – The Economic Stimulus Act of 2008 – was also a Bush administration initiative. And in the past, Republican administrations have not hesitated to use Keynesian economics, or whatever, to justify policies that help them attain their political and ideological goals.

Why the shift to such an extreme position now that Democrats are in power? Opposition to government help of any kind is often explained by the growing influence of the Tea Party. But the fact that the ideological agenda just happens to coincide with the interests of the wealthy backers of GOP politicians – many of whom also use their wealth to promote the Tea party – seems more consistent with an attempt to make ideological gains even if it comes at the expense of doing more for struggling households.

As income and wealth disparities have grown in recent decades, political power has shifted toward those who favor smaller government. Since successful government initiatives such as a job creation program could mean a larger government and higher taxes in the future, it shouldn’t come as a surprise that policymakers who have become increasingly beholden to these powerful interests would fail to devote enough attention to the unemployment problem.