GOP study backs 'cut and grow' but says new jobs could take time

It states that cutting federal spending “may” create jobs in the short term.

Asked about this and for more specifics on the number of jobs the GOP creates, Cantor said that promising that a policy will create a set number of jobs was a "trap" Democrats fell into with the stimulus bill.

"We don’t believe that you can necessarily waive a magic wand and create jobs," he admitted. Rep. Kevin Brady (R-Texas) added that it is not possible to guarantee job growth, but that the report points a path to create a better environment for it to happen.

Much of the 15-page report is devoted to attacking the idea, favored among liberals, that government spending should be increased during economic contractions to reduce unemployment. The idea is typically referred to as "Keynesian" theory, in reference to the economist John Maynard Keynes.

The GOP report states that “while Keynesian economic theory may sound plausible, it is not well supported.”

Obama administration officials argue that cutting spending now, during an economic recovery, could lead to hundreds of thousands of job losses. 

But Republicans in their report argued that neoclassical economists have a stronger case. Those economists argue that having federal spending at 24.7 percent of GDP, as is now the case, discourages work, savings and investment.

Those theories, embraced by Republicans, hold that reducing government spending increases economic efficiency by shifting financial, physical and labor resources to the private sector. That is because private firms are single-mindedly focused on maximizing wealth, while governments pursue other goals, the Republican report says.

The study argues that “non-Keynesian effects” result from government budget cuts. It says households expecting future taxes to pay for government spending will purchase more homes and durable consumer goods once uncertainty about future taxes is erased.

The same goes for business investment, the report argues.

There is no guarantee that this creates jobs immediately, the report says. It simply notes that studies have found 26 episodes in nine countries where spending cuts were linked to boosts in economic growth within three years.

“In some cases, ‘non-Keynesian’ effects may be strong enough to make fiscal consolidation programs expansionary in the short term,” the report states.

The report notes that with the U.S. facing other economic challenges, including inflation, loss of confidence in the dollar, euro-zone sovereign debt defaults, and war in the Middle East, the U.S. would be in a better place to respond to these challenges if wasteful spending was reduced now.