Creative Destruction

Republicans’ spending cuts could cost the country hundreds of thousands of jobs. They’re OK with that.

Reps. Eric Cantor and John Boehner

Democrats have been arguing for weeks that the GOP’s spending cuts will be bad for the economy, and in the last week they’ve celebrated two new analyses that bear none of their fingerprints but validate just about everything they’ve been saying. To which Republicans respond: And your point is … what, exactly? In the debate over the impact of federal spending on the economy, Democrats think they have turned over a royal flush. But it turns out the game Republicans are playing is blackjack.

Last week, ABC News obtained an analysis of the GOP’s spending cuts, put together by Goldman Sachs economist Alec Phillips, that predicted a one-time 0.8 point hit to GDP if the cuts passed. On Monday, the Washington Post produced an analysis of the cuts from Mark Zandi of Moody’s Economy.com that reached an equally gloomy conclusion: Slash spending at the level House Speaker John Boehner wants and watch the economy shed 700,000 jobs by the end of 2012.

On Tuesday morning, Boehner had a simple way to dismiss Zandi: He was Nancy Pelosi’s “pet economist,” not worth taking seriously. The day before, Majority Leader Eric Cantor came to his weekly briefing on Monday aware that he’d be asked about this—asked, at least, about Zandi—and he waved it off. “I would note that Mr. Zandi was a chief proponent of the Obama/Reid/Pelosi stimulus bill that we know has failed to deliver on the promise of making sure unemployment did not rise above 8 percent,” said Cantor. “I also think it is important to ask the question … ‘What kind of jobs is he talking about?’ Is he talking about government jobs, and, if so, why is the government hiring people it can’t afford to pay? This is obviously an unsustainable situation and something that we are trying to address through our approach in the CR we passed two weeks ago.”

Cantor got the obvious follow-up questions: Didn’t Republicans realize spending cuts would kill some jobs? After all, they want to terminate some government jobs and send some public-sector employees to the ranks of the unemployed.

Cantor parried by saying “the real question” was whether “you want the government to continue to fund jobs that we can’t afford.”

Zandi, Phillips, and other economists who think the government has been creating or saving jobs with supply-side spending are not taken seriously on the right. They have economic models that rate how much “bang for the buck” (they prefer this cliché) is delivered from various types of spending—unemployment checks, food stamps, tax cuts. They have the CBO’s numbers, which posit that 1.4 million to 3.5 million people have jobs that wouldn’t have existed without the stimulus package that became law two years ago this month. Republicans just don’t buy them.

“These analyses by the Keynesians are missing a key part of the story,” Rep. John Campbell, R-Calif., explained Monday. “One hundred percent of the money they’re talking about is borrowed. Republicans, right now, are talking about cutting spending on the margins, and 100 percent of what we don’t cut will be borrowed. The capital that they’re putting to work is capital that’s not improving something in the private sector, and all of these studies fail to take into account the interest we’re paying on the deficit.”

Campbell, an Ayn Rand disciple, has been saying this for a while. Republicans have started aping him only recently. Two years ago, as they opposed the stimulus bill, House Republicans reverse-engineered the White House’s economic models—models bearing a kissing-cousin resemblance to Zandi’s—and promised 6.2 million jobs for half the price of the Democrats’ proposal. The number was based on calculating how many jobs would be killed by tax hikes and inverting it.

This didn’t make much sense, and Republicans didn’t really believe it, but they were out of power. Their bill didn’t pass, so no one noticed. The Democrats’ stimulus did pass, and because unemployment went up, voters don’t think it worked. This gives Republicans a free hand to say anything they like about doomsaying predictions of cuts in government spending leading to cuts in employment. (Rep. Paul Ryan, R-Wis., who helped develop the GOP’s Potemkin stimulus, noted that the Democrats planned on spending $275,000 per job if their models worked; the current cost estimate per job is $228,055, as reported derisively by the conservative CNSNews.com.)

They may be dismissive, but Republicans aren’t Pollyannas about this stuff. Boehner’s comment to a Pacifica Radio reporter—if the spending cuts killed government jobs, he said, “so be it” —was not the party’s message. It’s not actually how they’ve been approaching their cuts.

A GOP aide with knowledge of the process that led to $61 billion in proposed cuts described it like this. The ideas for cuts came from plenty of places—a lot of them came from freshmen—but they were vetted by veteran staff on the Appropriations Committee. Those people tried to direct the cuts away from the salary side of the agencies they were attacking. They tried to target discretionary spending that was not part of salaries. For example, Republicans cut $1.3 billion of discretionary funding to community health centers; the Affordable Care Act, which is still there, stubbornly unrepealed, included mandatory funding for those health centers that the GOP didn’t touch.

The goal, even if GOP leaders won’t sing about it, was to shrink spending but leave employment as unmolested as possible. The agencies have discretion over how they use their shrunken budgets; they don’t have to cut back jobs.

The Republicans who’ll open up about possible job losses might have the more convincing case. Campbell talks about the losses as Joseph Schumpeter talked about creative destruction—temporary losses offset by sustainable gains.

“If we do not get the deficit down, if we don’t change trajectory, will lose more jobs than we lose from cuts,” Campbell said. “When a debt crisis hits, if we’ve still got 47 percent of our debt held by foreigners, we’ll have much greater job loss than that. Our first objective to is try and prevent a fiscal collapse, a la Greece. And it will take a longer time for the private sector to replace public-sector jobs that are cut, but when they do, they’ll last longer.”

Republicans have been talking like this for months, and they haven’t been hurt by it. The choice between stimulus spending and creative destruction is a choice between something voters don’t think worked and something voters don’t think we’ve tried. As long as voters don’t pay attention to how the U.K.’s austerity program is working, the GOP will be just fine.