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.