Members Only | September 23, 2022 | Reading Time: 4 minutes
Saying that spending hurts the economy doesn’t make it true
It’s false. But, you know, that’s the GOP for you.
Biden and Democrats are responsible for our shrinking economy, and they’re only trying to make it worse,” Ronna Romney McDaniel, chairwoman of the Republican National Committee, insisted at the end of July. Republicans have consistently claimed that Biden’s policy initiatives — covid aid, money to fight climate change, student loan forgiveness — have harmed the economy and increased inflation.
Fact is, the US economy has performed strongly under Joe Biden. That’s especially true when you compare it to European economies.
There are a number of possible reasons for the discrepancy. But one thing is certain: Democratic spending programs did not result in economic catastrophe. Republicans claim that government aid is useless and harms the economy. They have been proven wrong.
The Times’ Paul Krugman summarizes the relatively strong position of the US in comparison to Europe. In the fourth quarter of 2021, US GDP was 3 percent higher than before the pandemic. Europe, in contrast, had just reached the level it was before the covid.
The US Treasury Department reports that US recovery was the fastest among the G7 countries, including Germany, Japan, the eurozone, France, Canada, the UK and Italy. Krugman said total labor compensation in the US was up 13.6 percent since the beginning of the pandemic. It’s risen only 5.2 percent in Europe.
One result of greater US growth has been greater US inflation. US inflation was at 8.5 percent in July.
But US inflation has not been that out of line with other comparable economies. Annual inflation is around 5.9 percent in the EU. It’s been 7.6 percent in Canada, and around 10.1 percent in the UK.
Moreover, US inflation has been trending down while Europe, and particularly Germany, seem to be facing higher price increases.
So why has the US economy been doing so well?
One big reason is US natural resources. A major cause of economic turmoil globally has been the Russian invasion of Ukraine and the subsequent disruptions in energy imports.
The US is a net-importer of petroleum and natural gas, but it is also a major producer. High energy prices thus have complicated effects, raising prices but also creating growth in some economic sectors.
In comparison, many European countries are at the mercy of Russian energy. Russia has cut off supplies to punish the west for its aid to Ukraine. This has caused serious shocks in Europe.
Another factor is the very spending Republicans hate.
The US spent more than any other country in the world on covid aid. Biden’s $1.9 trillion American Rescue Plan was larger than the yearly economic output of Brazil and of most other countries in the world.
That’s because the US economy is huge.
But even as a percentage of GDP, US spending was impressive. All together, US spending on covid aid was about 27 percent of GDP. The only country that spent significantly more was Japan (at a whopping 54.9 percent of GDP, though some say those numbers are too high.)
Some other small countries, like Singapore, Slovenia and Guyana came close to the US. But the next major G7 country on the list is Germany, which spent only 20.32 percent of GDP on relief.
US spending had huge benefits. Direct payments like the expanded child tax credit caused the biggest drop in poverty in 50 years.
The pandemic recession, which was the worst since 1945, also was the shortest. Unemployment peaked at 14.7 percent during the worst of the pandemic. It is currently at 3.7 percent.
The economy is complicated. It’s difficult to figure out exactly how policies affect outcomes in a world where crises and shocks don’t pause to give experts a chance to tabulate and compare.
But we can be certain about a few things.
The US spent a huge amount on aid — more than just about any other country in absolute terms and as a percentage of GDP. And the US recovered more quickly than just about all comparable countries.
The Republicans claimed that the opposite would happen.
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They argued that more spending creates more inflation and worse economic outcomes. They insist that to get our economy back on track, we need to radically cut social programs and end aid.
They have been proven wrong.
Given the evidence, will Republicans reassess and stop trying to attack aid programs that saved us from a devastating recession?
Political scientist Jonathan Bernstein has pointed out that Republicans engage in a constant “war on budgeting.”
He means that the GOP doesn’t bother balancing revenues and outlays. Instead, they make-believe that programs they don’t like bust the budget while programs they do like are revenue neutral.
So massive tax cuts and defense spending have no budgetary effects, because “budget” just means “things the GOP likes.” On the other hand, even the smallest social spending creates unacceptable, “deficits” because the Republicans oppose social spending.
It’s fair to say the GOP is engaged not just in a war on budgeting, but in a war on economics, and for that matter on consensus reality.
When the GOP denounces Biden’s social spending, they don’t do so because they worry that it will harm the economy. They oppose spending because they hate helping people who aren’t wealthy. (Helping the wealthy, as with Trump’s tax cuts, is great, though.)
Republicans block social spending on ideological grounds while pretending to care about its economic effects. For example, they’ve successfully derailed further funds for covid and monkeypox relief.
The president seems to have acquiesced to this obstruction by claiming that the covid pandemic is over, even though 65,000 new cases and 400 deaths are being reported daily.
But if the economic data from the last few years shows us anything, it’s that spending in a crisis can help people and mitigate harm.
We are experiencing relative prosperity compared to Europe and compared to the aftermath of previous recessions. If we want that prosperity to continue, the government should be bold in using its power to preserve the health and welfare of the people.
Noah Berlatsky writes about the political economy for the Editorial Board. He lives in Chicago. Find him @nberlat.
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