The Politics of Economic Policy

August 1, 2010 by Andrew Posted in Current Events, Politics 8 Comments

In the past week, there have been two prominent opinion pieces attacking Republicans for their lack of concern about deficits over the past few decades. Neither talks much about Democrats and I’m not really sure if that’s because the authors think criticism of Democrats on this subject goes without saying or because the authors think there should be a balance between the two parties, with one being fiscally conservative and the other promoting welfare spending.

The first piece came last weekend form Martin Wolf, an associate editor and the chief economics commentator at the Financial Times. In it, he talks about what he sees as the political genius of supply-side economics, as well as the threat it poses to the future solvency of the United States.

The second piece was published in today’s New York Times. It was written by David Stockman, a director of the Office of Management and Budget under President Reagan. A nice summary of his op-ed might be: “I want my Party back.” It’s a very poignant criticism of the Republicans’ willingness to run massive deficits.

Both opinion pieces are worth reading. But while both talk about the fiscal irresponsibility of supply-side economics, neither talk about the fact that it hasn’t worked. Many tax cuts to the rich later and we have nothing to show for it in increased economic activity. This isn’t terribly surprising. When the government gives a tax cut to the rich, they save it or invest it in stock or bonds; they aren’t using it for venture capital. In contrast, when you give a tax cut to people who are barely putting food on the table, they have to spend it on commodities. In other words, it has a multiplier effect, creating spending of a value higher than the original government expenditure. So even if the Republicans were willing to cut spending to match their cuts in taxes, which they a very clear they aren’t willing to do, they’re giving the tax cuts to the wrong people if their desired result is increased economic activity.

Neither piece really talks about it, but what also needs to be said is that, once this recession is over, Democrats will need to get serious about dealing with the national debt, whether the Republicans are or aren’t. This means spending cuts and tax increases; according to the CBO report I posted yesterday, if these adjustments were to happen today they’d have to be 1% of federal spending. The longer we wait, the higher it will be. On the other hand, the Fed is beginning to worry about deflation and economists are now talking about permanently high unemployment. If we’d like to end the recession, we need more stimulus spending, as many economists predicted when they argued that the original stimulus package was far too small.

8 Responses to The Politics of Economic Policy

  1. kad barma says:

    I shudder whenever I read things like “if we’d like to end the recession, we need more stimulus spending”. Spending, per se, does NOT a recession relieve. In fact, certain spending, as with the 8.7 missing billions of Iraqi reconstruction dollars, is exactly what causes a recession in the first place. I would say, if the spending does not increase the wealth-producing capacity of a nation, it always MUST BE a net loss. (All borrowings need to be paid back eventually, with interest, and going into debt is NOT the right way to increase your standard of living, and you can ask any foreclosee about that). With that in mind, sure, some deficit spending can be a good thing, but the problem we have right now is that sitting pol’s are approving any “shovel-ready” nonsense they can find, often to the advantage of key constituents who also happen to be campaign contributors, and the end result is not good for our ability as a country to dig ourselves out of the hole we are in, and it absolutely does NOTHING to end this recession.

  2. Andrew says:

    The fact that the spending must produce the wealth-producing capacity of the US goes without saying; name one liberal economist who argues differently. In fact, that is the very criticism leveled from the Left against Obama’s stimulus package. It’s too small and it didn’t spend money in a way that would create a multiplier effect. It was idiotic to have a third of the stimulus package as tax cuts; they did nothing. And you’re right, shovel-ready projects weren’t necessarily the best idea. Far better to put construction workers to work better insulating government buildings and otherwise improving their energy efficiency, saving the government money and helping move us towards a green economy.

    However, the stimulus package did help end the free fall. It was enough for that at least. The measure of how effective it was is not whether the economy has recovered; the only relevant metric is how much worse we would be had the stimulus not been passed. It should have been much better designed, but it did have some positive effect.

    I would suggest you aim your criticism at the Right side of the political spectrum. If the Republicans gain power, its tax cuts galore, meaning increased deficits and, guess what, no increase in the “wealth-producing capacity of the nation.” They’ve failed time after time after time, yet the supply-siders keep claiming “oh, it will work this time.” Maybe if the “fiscal conservatives” in this country would take back their Party instead of voting for politicians who only seem to be interested in making the rich richer we wouldn’t be talking about a long-term debt problem.

    And if you really want to talk about growing our economy, you should probably start talking about reversing the massive redistribution of wealth upward that has occurred over the last three decades. Our consumption rates are dangerously lower than our production capacity; the only reason we kept up was that everyone decided to use their house as a bank. Those days are over. The rich don’t spend the money on commodities; the working and middle classes do. It doesn’t matter if demand is high; the actual resources most of the country has for consumption are far below where they need to be to grow the economy at a rate that isn’t anemic.

  6. Greg Page says:

    I was glad the NYT article mentioned the ticking timebombs of Social Security and Medicare.

    We could start to close the looming shortfall in Social Security by uncapping (or at least raising the cap) of the income ceiling at which we deduct from payroll for Social Security. Right now, only the first $106,800 of an employee’s wages are subject to the tax (Medicare does not have such a cap). The working- and middle-classes bear a disproportionate share of the burden for Social Security.

    I want to echo what Kad Barma said about the concept of using government spending to “prime the pump” of the economy — it only makes sense if it’s going to help the long-term structure of the economy (i.e. something like the Tennessee Valley Authority), improve our knowledge base (i.e. Hubble Space Telescope) or help our national security position and wallets (i.e. A Green Energy plan like Tom Friedman has been calling for since even before 9/11, as Paul highlighted today).

    I’ll readily and gladly acknowledge that the last President to oversee a balanced budget (heck, a surplus) was a Democrat. I’ll also acknowledge the major role that Republicans have played in getting us into this mess.

    That said, for every thoughtless Sean Hannity drone out there drawing Laffer Curves and spouting off about “all taxes are bad, and all tax cuts are good” there’s an equally uninformed partisan from the Left who thinks we can spend ourselves towards a fix without addressing the problems we’ve created with years of automatic public sector payraises, benefit increases, and pandering towards benefits of entitlement programs.

    Balanced voices are a thoughtful break from all that, which is why I enjoyed the CBO link posted here a couple days ago with a nod to Prof. Mankiw’s blog. The examples from Europe are scary, and telling.

  7. PaulM says:

    Can I say that the nation at large would benefit from the kind of discussion and information-sharing that goes on in the Lowell blogosphere—right, middle, left, neutral, whatever. Once in a while the dialogue spikes into the nasty zone, but overall the tone is respectful, practical, and public-spirited. I think most of us are trying to get to a more sane, more fair, more meaningful society, and we are distressed about the continued carnage, suffering, and inequality that we see out there. Sometimes “out there” is across the street, and sometimes “out there” is halfway across the world.