genius economics from the GOP

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Martin Wolf looks at the "political genius of supply-side economics," writing that "To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: 'supply-side economics'."

Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch? [...] Finally, if deficits did not, in fact, disappear, conservatives could fall back on the "starve the beast" theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

It's not just a political power-play, but a policy that has real-world consequences:

This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance.

Paul Krugman noted Martin's "deeply pessimistic note," and lamented "I wish I could disagree." Andrew Sullivan observed that "Anyone who wants to cut the debt and restore fiscal balance in America would be insane to vote Republican this fall:"

Why? Because they have still not abandoned supply-side economics, which was taken to its logical extremes under Bush and Cheney. [...] The Republican party has long prided itself on strong national defense and conservative economics. In fact, their recklessness in foreign adventurism has destroyed the deterrent effect of American power for a generation, while their fiscal policies have hollowed out this country's core fiscal health that we have almost no room for maneuver.

And yet slogans and amnesia still seem to be winning against arguments and data.

Speaking of arguments and data, the NY Times reported that "the government's sweeping interventions to prop up the economy since 2008 helped avert a second Depression," noting that "two leading economists wielding complex quantitative models say that assertion can be empirically proved:"

In a new paper, the economists [former Fed vice-chairman Alan Blinder and Mark Zandi from Moody's] argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration's fiscal stimulus program, the nation's gross domestic product would be about 6.5 percent lower this year.

In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation.

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This page contains a single entry by cognitivedissident published on July 27, 2010 1:14 PM.

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