15 October 2011

A Post in Which Your Blog Author Engages in Racism

The Republicans are like white men dancing. They've no sense of economic rhythm.

During the Bush years, Republicans applauded deficit spending, cheering for two military invasions coupled with tax cuts. Dick Cheney announced that "deficits don't matter." Fiscal policy - that mix of tax cuts and government spending - was expansionary and just created a bubble in an economy where jobs and incomes were barely keeping pace with population growth and inflation. Fiscal policy helped to create a housing bubble.

Now, with unemployment at its highest in decades, Republicans seem to think that only deficits matter. States and local governments have been shedding jobs at least as fast as companies can create them. Now that the private sector is - at best - sluggish, the Republican tilt is towards fiscal policy that contracts the economy. They aren't advocating tax hikes but they are demanding that government budgets be slashed. Sadly, the only attempt at coordination between the parties seems to be on the need for a fiscal policy that contracts; Republicans want more spending cuts and Democrats want tax hikes.

David Cameron of the UK is a smart, charismatic politician who heads the Conservative Party and is now the British Prime Minister. For about a year and a half, he's been engaged in an austerity program, raising taxes and slashing spending. His intention is to get Britain back on track. The result? Economic growth of 0.1% and the highest jobless numbers in 15 years.

Deficits matter. But not nearly as much as unemployment. Any program that has a hope of working has to first address unemployment and GDP growth AND THEN deficits. To reverse that is to risk falling into a downward spiral.

At the root of the problem is an obsolete worldview that sees the government as simply a big household. Any sane person running a household budget will cut spending in down times and raise them in good. This is not just sensible, it is intuitive. But applied to the level of the macroeconomy, it is a wildly misleading intuition, akin to the notion that it is the sun that orbits the earth rather than vice versa. What is obvious is wrong. To offset expansions that can create inflation in prices of goods or even stocks and houses, the government should actually spend less, tax more, be more austere in times of plenty. This is the opposite of what a household should do. A government should dampen economic cycles, not exacerbate them. And when times are tough, rather than practice austerity, governments should spend freely and tax lightly, stimulating spending, investment, and job creation when the private sector is lagging.

The debate between whether government should constitute 25% or 50% of the economy is  a legitimate one and Republicans have every right to argue for smaller government as counter balance to progressives who argue for larger government. That's fine. What's absurd and totally dangerous is calling for fiscal austerity, for smaller government, in the midst of a downturn. Failure to understand this distinction is either willful or stupid.

The fact of governments needing to offset business cycles is not new. This is something well known and well documented. It defines macroeconomics. And it is past time that the Republicans find their economic Arthur Murray who can teach them to hear the rhythm and respond to it. If they don't the result is going to be even more ugly.

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