Higher unemployment and lower wages — on purpose

HIGHER UNEMPLOYMENT AND LOWER WAGES — ON PURPOSE…. About a month ago, I described the Republican economic plan as “higher unemployment, lower wages, and slower growth.” It’s worth appreciating the fact that (a) I meant that literally; and (b) occasionally, GOP officials will acknowledge their intentions.

Tim Fernholz and Jim Tankersley reported this week on a little-noticed report distributed by House Speaker John Boehner’s (R-Ohio) office last week, summarizing the findings of the Republican staff of the Joint Economic Committee.

[T]he paper predicts that cutting the number of public employees would send highly skilled workers job hunting in the private sector, which in turn would lead to lower labor costs and increased employment. But “lowering labor costs” is economist-speak for lowering wages — does the GOP want to be in the position of advocating for lower wages for voters who work in the private sector?

The report also touts the value of cutting “transfer payments,” or subsidies, to private firms, suggesting cuts to Amtrak and ethanol support. But many Republicans back both of those objectives, and the GOP has long been a staunch defender of corporate subsidies through both spending and the tax code, including direct payments to agricultural firms.

Remember, independent economists, including some who have no sympathies for Democrats, have said the Republican spending cuts, if approved, would lead to roughly 700,000 job losses. (Told about making unemployment worse, John Boehner replied, “So be it.”)

But the GOP plan isn’t just to increase layoffs, at least in the short term, it’s also to intended to make sure Americans are earning less money.

Paul Krugman summarized the economic thinking embraced by congressional Republicans.

The idea is this: we’ll lay off government workers; this will raise unemployment, putting downward pressure on wages; and lower wages will lead to higher employment.

So, for this to work you first have to have a downward-sloping demand for labor as a function of the nominal wage rate. There’s no reason to believe that’s the case: in a liquidity trap, falling wages probably reduce the demand for labor, because they worsen the burden of debt.

And even if you somehow bypass this objection, the argument is still nonsense: it says that by reducing demand, you cut the price, which increases demand, which means that you end up selling more than before. Um, no — that’s the kind of answer that, in Econ 101, has you suggesting that the student get special tutoring…. As Wolfgang Pauli used to say, what we have here is an argument that isn’t even wrong.

If pressed, I suspect GOP leaders would say their radical experiment would only cause temporary pain throughout the economy. Sure, unemployment would go up and workers’ wages would go down, but that would only continue during a transition period.

And how long would America suffer while this transition continued? Republicans haven’t quite answered that one yet.

We really are in a through-the-looking-glass debate at this point. Republicans benefited greatly from a weak economy in 2010, riding a wave of public frustration to massive electoral gains. Voters, looking for a change from the status quo, expected the GOP to focus heavily on job creation and economic growth.

Just a few months later, Republicans have responded with a plan that would make unemployment worse, on purpose, while lowering Americans’ wages, on purpose.

And if Democrats resist, Republicans — who don’t believe in compromise — will shut down the government, block an extension of the debt limit, and push the economy back towards a recession.

One wonders if this is what midterm voters had in mind six months ago.

Down the rabbit hole we go.