Monday, November 12, 2018

Give more money to rich people

The year was 2011. Even though job creation had finally turned positive in the U.S. after the bloodletting of the Great Recession, the country's and world's economy was still depressed, and would remain so for years. Nobel laureate economist Paul Krugman's book End This Depression Now! would not be published for another year, and his advice would not be taken. Nobel laureate economist Joseph Stiglitz warned it would be many years—a decade all told—before the economy returned to normal. And so it was. Depressions are like that, especially if left unattended.

So naturally Republicans in the Congress back then were fixated on the debt. Majority leader Eric Cantor even tied the debt to the depressed economy, but by getting cause and effect exactly backwards. Cantor bizarrely suggested the debt caused the depression, or at least exacerbated and prolonged it, not the other way around. As economics it was absurd. Which is to say: exactly what you'd expect from a Republican politician.

Krugman recently posted a very short essay in which he notes that U.S. "fiscal policy has been off the rails since 2010, not because of what it has done to the national debt, but because of what it has done to the macroeconomy." (Fiscal policy refers to things like government spending, borrowing, and tax policy, whereas monetary policy refers to the interest rate setting and money supply functions of the Federal Reserve.)

"Here’s what fiscal policy should do," Krugman writes. "It should support demand when the economy is weak, and it should pull that support back when the economy is strong. As John Maynard Keynes said, 'The boom, not the slump, is the right time for austerity.' And up until 2010 the U.S. more or less followed that prescription. Since then, however, fiscal policy has become perverse: first austerity despite high unemployment, now expansion despite low unemployment." This perverse policy has coincided with Republican control of the House and later the full Congress.

Back in 2012, Krugman's prescription to End This Depression Now! included ending the austerity insanity driven by deficit hysteria that was keeping the economy depressed far longer than need be. A weak economy is precisely when government spending financed by borrowing is called for, because the government is uniquely able to make up some of the sorely needed demand that's missing from the economy as the private sector pulls back. In other words, the government can buy things when nobody else can or will, keeping businesses solvent and workers employed while the economy heals. This is textbook economics.

By contrast, the Republican prescription is for the government to cut spending at the same time as the private sector, leading to deeper cycles of economic weakness. One reason this is perverse is that the resulting downward spiral leads to even less business activity and more layoffs, and so even less government revenue. If that weren't bad enough, the layoffs lead to higher outlays for things like food assistance and unemployment insurance. So the deficit increases from both ends by the very act of trying to contain it by cutting spending. As economist Brad DeLong noted in 2013, "the debt-to-annual-GDP ratio has a denominator as well as a numerator," an observation you should ponder until  you understand its implication.

Adding insult to injury, such economic disintegration delays recovery and reduces future economic output relative to what it otherwise would have been, which impacts government revenues and thus debt over the long term. The crucial need for government deficit spending is one of the many unpleasant but unavoidable realities of a very weak economy.

But now, in 2018, with the economy near full employment, a very economically strange thing happened: Republicans passed a large tax cut, providing massive fiscal stimulus at a time when, according to Krugman and Keynes, the economic support should be pulled back, not expanded.

The tax cut is not just backwards as a matter of economics; it's also horrible as a matter of fiscal policy. That huge tax cut will add at least $1.5 trillion to the debt over a decade, at a time when that debt will do little good and much harm. Consider, for example, that with the labor market already tight, deficit spending now will "buy" far fewer jobs than it would in a depressed economy with high unemployment.

To restate, deficit spending is called for in a weak economy, not a strong one. Already the deficit has exploded in the wake of the tax cut—even as economic growth has been solid. A strong economy should generate more tax revenues and drive the deficit lower, but the opposite is actually happening. This is quite unprecedented.

So Keynes tells us the government should run deficits when the economy is weak, and should balance its budget or run surpluses when the economy is strong. Republicans, in word and deed, unfailingly say the government should practice fiscal austerity when the economy is weak and desperately needs stimulus, and should be fiscally profligate when the economy is strong and doesn't need it.

This is economic and fiscal malpractice. It should also put the lie, once and forever (how many times does that need to be said?), to the the notion that Republicans are innately and fundamentally averse to deficits. As their actual behavior under Reagan, Bush the younger, and now Trump demonstrates, Republicans only hate deficits when a Democrat is president. The myth of Republican fiscal conservatism has been carefully cultivated for decades, but it is complete nonsense.

Krugman concludes that, "now, with unemployment very low but a Republican in the White House, we’re getting the fiscal stimulus we desperately needed then – and don’t need now. Fiscal policy, like so much of governance in America, has been perverted by right-wing partisanship."

Economist Dean Baker notes that it's been almost a year since the Republican tax cut and there's been no sign of the promised business investment boom. That's a big oops.

It's a problem in part because it is a longstanding matter of Republican religion that tax cuts pay for themselves by stimulating business investment sufficiently to grow the economy and generate offsetting tax revenues. That claim has always been economic fantasy, akin to belief in a sort of free lunch or perpetual motion machine.

But the claim continues to be made. In promoting the tax cuts, Mitch McConnell said, "I’m totally confident this is a revenue neutral bill. Actually a revenue producer." A revenue producer! That despite CBO and JCT projections of a huge increase in debt as a result  of the cuts—projections which are already coming true.

This is what happens when you don't listen to experts—a pathology that's endemic on the ideological right. Which ought to be a parable for all kinds of ignorance in these troubled times. Pick almost any subject or question and you will find Republicans occupying the side opposite the experts.

On the present topic, the tax cuts are in fact already very revenue negative. McConnell might have been adequately forewarned had he allowed committee hearings and expert testimony on the tax bill consistent with "regular order" and proper legislative practice. Astoundingly, there were none.

Baker says if we've not seen any whiff of the promised investment growth by now, it probably won't materialize. "Cuts in corporate tax rates are not an effective way to boost investment," Baker says. "They are an effective way to give more money to rich people." Which, in the end, is what Republicanism is fundamentally all about.

Copyright (C) 2018 James Michael Brennan, All Rights Reserved

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