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Hoover, version 2

Sunday, March 8, 2009
Keywords: Politics, Economics

The words of John Boehner, leader of the House Republicans:

American families are tightening their belts. But they don't see government tightening its belt.

The very reason why people are being forced to "tighten their belts" is because everyone is trying to do some belt-tightening. I find it incredible--stunning, even--that these Republicans cannot grasp the concept that Alice cannot save money unless Alice gets money to save (i.e., Bob needs to buy goods and services from Alice), which is not going to happen if Bob is trying to save money at the same time (which is also a doomed endeavor since Alice is also trying to stockpile money and will not buy from Bob). It is like the economic equivalent of the conservation of momentum: any amount of savings (consider it a "surplus" budget) must necessarily be balanced by an equivalent amount of "deficit" elsewhere, and because everyone has been spooked into saving, the government must embark on deficit spending to counteract this, or else we will be repeating the mistakes that another Republican made 80 years ago.

Boehner has gone as far as push a vote to freeze government spending for the year (the measure failed, but it did get the vote of every House Republican). I sincerely hope that the Republicans are merely engaging in political theatrics, knowing that their destructive policies cannot be passed, since the alternative--that they actually believe that freezing spending will help--is a terrifying prospect.

Another common Republican refrain is that public spending will crowd out private investment and thus worsen the problem. In a recent (and very popular) op-ed in the Wall Street Journal, we hear this tired old line:

[Taxes will] reduce incentives for our most productive citizens and small businesses to work, save and invest ...

I doubt very much that there is any shortage of an incentive to work in this recession; the labor market is very much a buyer's market right now. As for saving and investing, while this argument may hold some water during good times when the economy is running at capacity, the problem of a recession is that we are underutilizing capital due to slackening demand. Both physical and human capital--e.g., factories and talent--are being idled, and the very notion that the solution to underused capacity and idled capital stock is to increase capacity and capital stock is absolutely ridiculous.

Finally, Republicans are fond of raising fears about the effects of high government debt. What they (and the media) fail to mention is that, while our public debt is at historically high levels in nominal terms, our public debt as a percent of GDP is very low: approximately 40%. In contrast, following the Second World War, our public debt as a percent of GDP was nearly 110% and yet we experienced a long post-war economic boom. For further perspective, consider that Canadian, German and French public debt currently exceed 60% of their GDPs, Italian public debt exceeds 100% of their GDP, and Japanese public debt is currently at 170% of their GDP. Aside from a failure to put things into perspective, people also confuse private debt (mortgages, credit card debt, etc.) and public debt (government borrowing). Our problem now (and our problem at the start of the Great Depression) is that private debt had grown to unhealthy levels. While we can all agree that a high level of public debt is undesirable, it is less undesirable than high levels of private debt. Increasing public debt through government spending is an effective way to reduce private debt (think of it as a transfer from private debt to public debt: government spending creates the paychecks necessary for people to pay down their debt), which is the way to dig out of this crisis. This is how we dug out of the Great Depression--the "high" levels of public debt following the war was matched by substantially lower private debt--and this is what needs to be done again today.

The Republican opposition--driven by ideology instead of a pragmatic application of basic economic principles--is harmful in two ways: first, this high amount of political pushback makes it difficult for government to do what needs to be done, and second, the Republicans are destroying themselves, and as much as liberals may rejoice at the spectacle of the latter, a one-party system is not healthy in the long-run.

This entry was edited on 2009/03/08 at 22:45:39 GMT -0400.

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