Since 1980, the Republican Party has advocated a peculiar variation on an old economic model. While they shout loudly about shrinking government and the free market, in practice both the Reagan and Bush administrations have ballooned the deficit and increased government spending, particularly on the military. Both Reagan and Bush bragged about cutting taxes. This combination of increased spending and decreased tax collection resulted in the rising deficits. It's also very similar to the active, counter cyclical fiscal policies John Meynard Keynes proposed. The idea is that by engaging in deficit spending and active fiscal policies, governments can stimulate sluggish economies.
Sunday, September 07, 2008
Traditional Keynesian political economy would say that you tax to build up surplus revenue when times are good and engage in deficit spending when the economy is a downturn. The spending traditional Keynesians advocate would be on worker retraining, unemployment insurance, education, health care, and subsidies for protected industries. After decades of this western economies stalled in the 1970s. Deficits and debts caused a series of currency crises around the world - including in Europe and the US.
The Republican variant is keep taxes low all the time - even when times are good - and engage in deficit spending all the time. Republicans spend that money mainly on the military and subsidies for protected industries. In effect, they have a militarized version of Keynesian economics that is even more prone to deficit and debt problems that hamstring the economy in the medium and long term. The declining dollar, global credit crunch and related mortgage crisis are symptoms.
Subsidizing protected industries is always a bad idea. So both the traditional Keynesians and the Militarized Keynesians in the GOP are wrong there. But when it comes to the other spending priorities, worker training and unemployment insurance are better stimulus strategies than military spending. The first group of strategies spend money on things that build things for the future (especially those related to education). Military spending ends up being destroyed and the only way it results in knock on stimulus effects is if the government commits to replace destroyed material and through technological developments that trickle down to the civilian economy.
It's easy to play the Keynesian game too long. At some point you have to balance the budget or at least make a reasonable attempt at it. If you don't the government starts soaking up higher and higher percentages of the available capital at the same time that the dollar starts to weaken. If you combine this with some external shock - like sharp increases in oil prices as we saw in the 1970s and see again today - the result can be stagflation. Stagflation is about the worst economic situation you can imagine short of a depression and that is exactly what we will see if Republican political economy continues.
Posted by Raised By Republicans at 6:17 AM