Economic Underpinnings Of “The House Republican Plan For America’s Job Creators”

Such as they are.

In reading this short document (a word count was 2069, essentially a 8 page paper, shorter than the term papers I assign), I was pervaded by a sense of déjà vu. There are many interesting assertions (not a single footnote in the entire document). Rejoinders to some assertions are here. I’ll focus on some key guffaw-inducing assertions, relying largely upon previous Econbrowser posts.


From the Republican plan:

… At a combined state and federal rate of just over 39%, the U.S. currently has the second-highest corporate tax rate among the developed nations of the world (those in the OECD). The U.S. federal rate of 35% is nearly 10 percentage points higher than the average of our competitors.

From a CBO report, cited in this post:

Although the United States’ statutory corporate tax rates are among the highest of those in OECD countries, they are comparable with the statutory rates imposed by other members of the Group of Seven (G7).

How effective marginal corporate tax rates in the United States compare with other countries’ rates depends on the type of corporate investment being made and the way in which it is financed. Corporate investments are financed by either shareholders or lenders (which include corporate bondholders). Compared with the average effective marginal corporate tax rates for shareholder-financed investment in machinery among all other OECD countries, the United States’ rate is slightly higher; compared with the average among other G7 countries, the United States’ rate is about the same. Compared with the average rate for shareholder-financed investment in industrial structures among all other OECD countries, the United States’ rate is significantly higher; however, the United States’ rate is close to the average among other G7 countries. In contrast to rates for shareholder-financed investment, the United States’ effective marginal corporate tax rate for lender-financed investment in machinery is low by comparison with the average for other OECD countries and for other G7 countries. From an international perspective, although the United States’ effective marginal corporate rates for shareholder-financed investments are higher than the average, such rates for investments financed by a combination of shareholders and lenders may be lower than the average if a sufficient fraction of the marginal investment is financed by lenders.

One line from the Republican solution struck me as interesting: “We will set the top tax rates at no more than 25% for job creating businesses.” Does this mean they will allow higher tax rates for businesses that are experiencing net job losses? That sounds a bit like industrial policy.


The Republican view is that passing trade agreements with Panama, Colombia, and South Korea are the solution.

Background: The independent International Trade Commission has estimated that implementation of the three pending free trade agreements would increase U.S. exports by more than $10 billion – an increase that according to the Obama Administration, would create over 250,000 jobs.

I’m for liberalizing trade, and if an FTA truly does liberalize trade (see here), then that makes sense. But one should keep in perspective what $10 billion represents. In 2011Q1, US exports were $2.02 trillion, seasonally adjusted at an annual rate. In other words, that $10 billion represents 0.5%. It’s a substantial number in absolute terms, but hardly likely to have anything near a noticeable effect the US trade balance. The impact on exports is shown below:

Figure 1: Exports, in billion $, SAAR (blue line), and adding $10 billion to 2011Q1 exports. NBER defined recession dates shaded grey. Source: BEA, 2011Q2 2nd release, GOP, NBER, and author’s calculations.

The red triangle illustrates what would happen if in 2011Q1 exports were suddenly $10 billion higher. In reality, the $10 billion increase would take place years in the future.

The report is remarkably silent on what would be a very effective route to greater macro competitiveness, namely continued dollar depreciation. [1] [2]. But given the Republicans difficulty with the economic history of international finance, [3] I am not surprised.


From the GOP plan:

Since President Obama has taken office, American energy production has been halted and the average national price of gasoline has doubled. The rising cost of gasoline and dependence on foreign oil mean less money for families struggling to make ends meet and for business owner who are trying to get our economy moving again.


… House Republicans are taking immediate action through our American Energy Initiative by passing bipartisan legislation to expand energy exploration and production. This will help create American jobs, grow our economy, and enhance our security.

The American Energy Initiative entails accelerating offshore exploration, leasing and drilling. It is correct to say energy prices (gasoline, oil) are higher than when President Obama took office. It is also correct to say that April prices are below peaks reached under President Bush, as indicated in Figure 2.

Figure 2: Gasoline price (all formulations), $/gallon (blue line, left axis), and petroleum price (WTI), $/bbl. (red line, right axis). NBER defined recession dates shaded grey. Dashed line at 2009M01. Source: St. Louis Fed FREDII.

I wondered about the statement that “energy production has been halted”. That can’t literally be true, so I’ll chalk that up to some literary excess (along the lines of “death panels”). Here’s some actual data.


That figure shows an upward trend in production in 2009. More up to date data shows the trend continuing.

Figure 4: US crude oil production, in millions of barrels per month (blue line), and twelve month trailing moving average (red line), 2000M01-2011M03. Dashed line at 2009M01. Source: Energy Information Administration/Department of Energy.

In other words, the quoted passage is factually incorrect.

More fundamentally, the implicit argument that increased US oil production by tapping offshore sources would have an appreciable impact on current oil and gasoline prices is problematic, to say the least. In this post, I lay out the reasons why immediately allowing more offshore exploration would not lead to an appreciable impact on (globally determined) oil prices.

Spending and the National Debt

From the Republican plan:

The federal government is spending and borrowing so much that the United States will soon go broke. …

President Obama and congressional Democrats have overseen the largest budget deficits in the history of the U.S. In the last two years, non-defence discretionary spending has increased by over 80%. … To create jobs and save our country from national bankruptcy, we must stop spending money we don’t have.


We will work to control the federal deficit to assure investors and entrepreneurs that our nation’s elected leaders are finally getting serious about paying off the debt over time and will bring back confidence by supporting long-term economic growth. House Republicans have already begun to reduce spending in a meaningful way by approving legislation to decrease spending for the rest of the year and adopting a budget that reduces government spending by almost $6 trillion over the next 10 years.

To begin with, I think it useful to put into perspective the debt accumulation over time.

Figure 5: Federal debt held by the public as a ratio to nominal GDP (blue line), and as a ratio to potential GDP (from CBO). Vertical dashed lines at 1992Q4, 2000Q4, 2008Q4. Source: St. Louis Fed FREDII, and CBO Budget and Economic Outlook (January 2011).

Not only did debt to GDP rise by 11 ppts (8.3 ppts as share of potential GDP) over the Bush administration (from 2000Q4 to 2008Q4), the trajectory was reversed — from declining debt/GDP to rising.

The $6 trillion reduction is, I believe, an allusion to the Ryan Plan. The return of the magic asterisk in the Ryan plan, which makes a lot of the maths work, is discussed here. The heroic economic assumptions necessary to achieve these targets have been discussed here, here, and here. As Econbrowser readers might recall, Heritage has never rebutted the charges of implausible estimates leveled by me, as well as Macroeconomic Advisers.

This post was published at Econbrowser.