Republicans' two-point plan to create jobs: Can it work?

Don't like what Democrats have offered so far to cure unemployment? Here's a look at the Republican plan to create jobs – and what economists think of it.

Republicans in Congress are urging two simple steps they say will help put Americans back to work: Freeze all tax rates at current levels and reduce federal spending.

This is very different from what the Democrats have been pursuing, and in some ways it flies in the face of conventional economic theories. Cut government spending when the private sector is in slow gear? That's not what the textbooks typically offer as a way to rev up growth.

But these things are for sure: An improving job market is Americans' top election-season priority, and they're not happy with the status quo.

So how viable is that "two-point plan," espoused recently by House Republican leader John Boehner? Would it work?

Economists are divided on these questions, but fairly broad agreement exists on a few points. One is that it would be beneficial to provide clarity on tax rates – which the first part of the Republican plan seeks to achieve and critics say President Obama has failed to do. Another is that spending cuts hold less promise than tax-rate policy as a lever for job creation.

Supporters and critics of these GOP proposals concur on one more thing: Voters shouldn't expect a quick fix. Good policies can help the job market heal faster, but the process will still take several years, forecasters predict.

"Is [the GOP plan] a panacea for what ails the economy? Probably not," says Sean Snaith, who heads the Institute for Economic Competitiveness at the University of Central Florida in Orlando. But "in the sense that this provides a little stability, it could be beneficial."

The stability he's referring to is as much psychological as financial.

"There's a real sense that we're without a rudder right now," Mr. Snaith says. "We're seeing program after program put up [by Washington] ... and really little effect as far as job growth is concerned."

In this view, a key merit of the Republican proposals is that they represent a less-is-more approach to policy after two years of emergency intervention in the economy and record stimulus spending by the government.

But Representative Boehner's plan also has plenty of critics. The House leadership is set to elaborate Thursday on its "governing agenda" should it win in the midterm elections, which may include more detail about a jobs-creation plan. In the meantime, here's a closer look at the arguments for and against the Republican two-point plan.

The case for federal spending cuts

The Boehner plan would bring federal spending back to 2008 levels, excluding national-security expenditures and programs for seniors and veterans, such as Social Security. That means some big one-year cuts (about $100 billion worth, according to House Republicans) in an Obama budget proposal that totals $3.8 trillion in spending for 2011.

Potential cuts, according to ideas put forward this year by Republicans within the House Budget Committee, could include canceling stimulus projects for which money hasn't yet been committed, freezing federal salaries temporarily, or hiring only one federal worker for every two who retire.

Supporters of a reduction in federal spending fall into two camps: those who doubt that initial rounds of spending stimulus have helped and those who say the economy is in a different place from where it was 18 months ago, with less need of temporary stimulus today and more need for fiscal discipline.

Spending cuts could help signal that Washington policymakers are starting to get serious about tackling America's long-term fiscal challenge – a persistent gap between federal spending and revenues.

Boosters of this idea also say that spending cuts might free up resources that would be used more efficiently by the private sector. "The economy will recover very nicely," albeit gradually, under Boehner's plan, predicts economist J.D. Foster at the conservative Heritage Foundation in Washington.

The case for spending cuts is partly an expression of doubt about the effectiveness of traditional stimulus via deficit spending. Researchers, including Harvard University's Robert Barro, have published studies suggesting that increased spending serves mainly to shift money around within the economy, while doing relatively little to expand the gross domestic product.

The case against spending cuts

Foes of spending cuts say the move would harm a still-fragile economy that remains at risk of falling back into recession. When the economy is weak, economists in this camp argue, government spending acts to fuel demand for goods and services, rather than "crowding out" private-sector activity.

Even those who put a high priority on repairing federal finances concur.

"We don't want to endanger the recovery," says Diane Lim Rogers, chief economist at the Concord Coalition, a nonpartisan group in Arlington, Va., that promotes fiscal responsibility. She suggests that cuts in federal spending should be avoided for a couple of years, as the economy is finding its footing.

Moreover, budget experts say, short-term cuts can't substitute for providing a credible long-term plan to deal with federal deficits. The best confidence booster for businesses and taxpayers might be to see Washington come up with fixes for long-term challenges that Boehner's plan doesn't address, such as the growing federal tab for Medicare.

Mr. Obama has created a bipartisan fiscal commission to come up with long-term proposals on spending and taxes.

Some critics of the Republican plan go a step further. They say the problem with Obama's roughly $787 billion Recovery Act stimulus wasn't that it failed to work, but that it was too small. Given the magnitude of the jobs problem, with 15 million Americans unemployed, more stimulus spending is needed to put the US economy back into gear, they argue.

Right or wrong, that idea doesn't appear to have much political backing now. Obama has rolled out some additional proposals designed to buoy the economy via tax breaks for business, but with relatively small price tags.

The case for freezing current tax rates

Boehner's proposal for a two-year freeze on tax rates would maintain all the Bush tax cuts. By contrast, Obama wants to keep the tax cuts in place only for households with incomes below $250,000. Based on this difference, the Boehner plan would cost the federal government about $34 billion in revenue during 2011.

The tax freeze, like the Republican proposal to repeal Obama's health-care reform, would serve as a kind of "time­out" from big changes, so the economic recovery can gather momentum.

"America's employers are afraid to invest in an economy stalled by 'stimulus' spending and hamstrung by uncertainty," Boehner said in a recent speech in his native Ohio. "The prospect of higher taxes, stricter rules, and more regulations has employers sitting on their hands."

Although many economists don't share Boehner's view of Obama's 2009 stimulus effort, his view on "uncertainty" resonates. Amid employer worries that the Obama administration isn't creating a positive climate for business, holding tax rates steady could be a first step toward rebuilding private-sector confidence.

Snaith, the Florida economist, supported the general scope of the initial Obama stimulus in 2009 but now says the GOP proposals would help achieve a faster reduction in unemployment.

A majority of private-sector economists favor keeping all the Bush tax cuts in place at least for a time, according to one recent survey by the National Association for Business Economics.

The case against a tax-rate freeze

The opposing view is that allowing the Bush tax cuts to expire for the top-earning 3 percent of Americans won't affect their spending and investing enough to drag down the economy.

Obama, also in Ohio recently, argued that middle-class Americans need a tax break more than the wealthy do. "These families are the ones who saw their wages and incomes flat-line over the last decade. You deserve a break," he said.

Obama maintained that job creation worked fine under President Clinton, with the same top tax rates that the White House wants to return to.

Some opponents of a tax-rate freeze also reason this way: If a core problem for business leaders is uncertainty about future policy, a two-year hiatus from tax changes is at best a partial fix. CEOs making long-term decisions would still be unsure about taxes for Year 3 and beyond.

Ms. Rogers argues that the best confidence boost on the tax front will come from deeper tax-code reforms, rather than a wholesale embrace of the tax cuts. "The Bush tax cuts are far from the best kind of stimulus," she says. "How does that instill confidence for [Obama] to turn around and say, 'That's my tax policy too?' "

Over the course of this decade, allowing the Bush tax cuts to expire for high-income Americans would help reduce federal debt – saving nearly $700 billion by White House estimates.