THE PLEDGE FOR AMERICA--AN ANALYSIS

An Analysis from
The Economic Policy Institute

By Andrew Fieldhouse and Rebecca Thiess

Republican House Minority Leader John Boehner recently proposed a two-step job creation plan consisting of a full extension of Bush-era tax changes and cuts to domestic spending. His plan calls on Congress to cut non-security related spending back to fiscal year 2008 levels and to enact a two-year freeze on all current
tax rates.

Rep. Boehner claims these two policies will drive job growth more than any proposal of President Obama’s. However,we find that this proposal would have a devastating impact on the struggling U.S. labor market while negligibly improving the fiscal outlook. Specifically, we find:

• Relative to the president’s budget request, the plan would reduce funding for domestic programs—which include investments in infrastructure, education, and research—by 22.7%, while extending the Bush tax cuts for top earners.

• The Boehner plan would reduce the deficit by less than 5.5% in 2011.

• Because reductions in spending are larger than the tax cuts, and because tax cuts for upper-income taxpayers are poor stimulus, the net job impact of the Boehner plan would be an estimated employment reduction of over 1 million jobs.

The Boehner Plan, Step 1:
Cutting Funding by 22.7% The Boehner plan calls on Congress to cut non-security related spending back to 2008 levels. This would require a spending reduction in this category of $105 billion in 2011. Maintaining Department of Defense, Department of Veterans Affairs, and Department of Homeland Security at the funding levels requested in the president’s budget would exempt $673 billion from these cuts. Thus, to achieve the overall reductions, non-security funding would have to be cut to $356 billion—an across the board cut of 22.7% relative to the president’s budget request and 6.9% lower than 2010 levels, adjusted for inflation.

How to Lose Over A Million Jobs
Proposed savings on the scale of $100 billion suggest fiscal responsibility, however limiting reductions to a very narrow portion of the budget wou d result in drastic and politically unrealistic cuts to many human needs and investment programs. Savings of $105 billion would only close 7.8% of the projected 2011 deficit, based on the Congressional Budget Office’s (CBO) estimate of the president’s budget, and the reduction does not take into consideration the proposed tax cuts for the wealthy (CBO 2010b).

The Boehner Plan, Step 2:
Tax Cuts for the Richest Americans
The next segment of Rep. Boehner’s plan would freeze all current tax rates, meaning that the 2001 and 2003 Bush tax cuts would be extended for all taxpayers, regardless of income. The proposal would also freeze the estate tax at its current rate of zero percent. President Obama has proposed to permanently cut taxes for 97% of Americans and allow rates to rise for joint filers making over $250,000 annually (TPC 2010). If the two-year tax freeze were made a permanent tax cut for high-income individuals—as Rep. Boehner has advocated—it would cost $629 billion more than President Obama’s proposal over the next decade. In 2011 alone, Rep. Boehner’s proposed individual income tax cuts would cost $30 billion more than the Obama approach (OMB 2010b).

Impact on Deficits and Jobs
Rep. Boehner’s proposal would save $105 billion by cutting non-security discretionary programs; however, it would simultaneously increase the deficit by $30 billion to extend tax cuts for the 3% of the population with the highest incomes. Combining these two policies, his proposal saves on net $74 billion in 2011, which would reduce the deficit by only 5.5%.

The individual income tax cuts for the rich and the cuts to spending will have different impacts on overall employment, both because of their overall size and their per dollar effect on near-term spending. Using fiscal multipliers from the CBO to measure the separate impacts of the tax cuts and the spending cuts on gross domestic product (GDP), we found that GDP would shrink by 1.1%—or about $171 billion—due to this proposal (CBO 2010c). The tax cuts themselves would modestly expand GDP, but permanent tax cuts demonstrate one of the lowest bang-for-the-buck options of any stimulus policies. The adverse impact of the spending cuts, meanwhile, would overwhelm the limited growth impact associated with the tax cuts, substantially decreasing output on net. Using a rule of thumb for the impact of government spending on employment, we estimate that this loss of GDP will correspond to a loss of roughly 1.1 million jobs, relative to a fiscal path that maintains spending at the president’s proposed 2011 levels and a tax policy that did not extend tax cuts for upper-income taxpayers.

Plan Slashes Investments in Education, Research,
and Infrastructure
Besides costing the economy jobs today, the Boehner economic plan would be detrimental to our investment deficit and longer-term growth. The nation’s schools, roads, railroads, sewers, and energy grid need repair, not funding cuts. If the 22.7% non-security discretionary cut were enacted across the board, it would undermine opportunities for our children and hurt American competitiveness in the 21st century. For example, spending on education would drop nearly $10 billion in one year alone. Funding for research at the National Institutes of Health would fall more than $7 billion. And spending on ground transportation and infrastructure investments would decrease nearly $8 billion—all in one year. It is these cuts to investment that would account for much of the expected job losses and decrease in output. Rep. Boehner’s plan to drive job growth would actually slow economic growth for years to come.


About The Economic Policy Institute
The Economic Policy Institute, a nonprofit Washington D.C. think tank, was created in 1986 to broaden the discussion about economic policy to include the interests of low- and middle-income workers. Today, with global competition expanding, wage inequality rising, and the methods and nature of work changing in fundamental ways, it is as crucial as ever that people who work for a living have a voice in the economic discourse.

EPI was the first — and remains the premier — organization to focus on the economic condition of low- and middle-income Americans and their families. Its careful research on the status of American workers has become the gold standard in that field.

Its founders include Jeff Faux, EPI's first president; economist Barry Bluestone of Northeastern University; Robert Kuttner, columnist for Business Week and Newsweek and editor of The American Prospect; Ray Marshall, former U.S. secretary of labor and professor at the LBJ School of Public Affairs, University of Texas-Austin; Robert Reich, former U.S. secretary of labor and professor at UC Berkeley; and economist Lester Thurow of the MIT Sloan School of Management.