The simple reason why Republicans are bad for today’s economy is they are wrong.
If you are a thinking, rational, common sense kind of a person — if you’re not a Republican — push it all aside. Have some fun. Go look in the mirror and be perplexed by the nose on your face. Don’t like it? It might not be yours. Who knows? Who cares? Ignorance is power and you won’t be tested on this stuff anyway.
The reasons why Republicans are wrong about the economy are obvious. Empirical evidence, hard data, and simple everyday experience should make all of this plain, but let’s not talk about that. How about a simple — a very simple — review of the economics behind their wrong-headedness?
I am going to introduce two economists with what appear to be opposing views. I’d argue, however, that in the long-run — yes, the long-run — they are essentially compatible theories of macroeconomics.
In one corner we have Jean-Baptiste Say, a French economist credited with the argument that supply creates its own demand and the principle known as Say’s Law. In essence, although very imperfectly, this is standard upon which conservatives make their economic arguments. In reality they are presuming a sort of demand-side principle to argue that money in the hands of “job creators” will create jobs, but that might complicate this simple summary too much.
In the other corner is John Maynard Keynes, the economist whose principles support more progressive economic action, especially on the part of government, to bolster demand and thus spur a slogging economy. This is the Keynsian Economics that conservatives love to hate without sound reason.
In truth both arguments have their time and place in macroeconomic policy, but our leadership today — bolstered by stubbornly dissonant public opinion which supports policies least favorable to majority interests — is way off base when it comes to macroeconomic policy. There are smart people out there who have made a career of studying what is now centuries of economic history and thought. Unfortunately, we don’t respect intelligent thought in this country, especially if you are a conservative; we suspect it.
Let’s start with Say and Say’s Law: Supply creates its own demand. Republicans continue to argue that giving breaks to “job creators” we are giving those job creators more resources to grow the economy. You can only grow the economy if production increases. Thus they are arguing that creating supply — whether of goods or services — will bolster economic growth. Say’s Law would seem to affirm this. Aggregate supply will be equated by aggregate demand. In other words, if you build it, they will come. Thus conservatives argue, if you give job creators — in their parlance investors, business owners, corporations, etc — they will be able to create more supply.
There is one little problem with this idea. It is called a recession, from which, by the way, we happen to be slowly recovering from now. Some would argue, especially on the right, that we are still in a recession. Recessions cause problems for the supply side argument. In fact recessions are inherently incompatible with supply side macroeconomic policy.
If you can always create more demand by increasing supply, why should we ever worry about unemployment? Why would the economy every recede rather than grow? Just pump more supply into the economy and it will spur demand. Right?
You don’t need a degree in economics to see that this fails. You only need to pay attention to what is happening in our economy and the global economy today. The “job creators”, for example, have their wealth — record piles of it — and yet where is the increased production? Where is the increase supply? Where are the jobs? Where is the growth?
In the short run — in a period of recession — it is obvious that supply side economics doesn’t offer a solution. A recession isn’t a matter of winners and losers off-setting each other, the entire economy as a whole is contracting. Production and growth decline. Just the opposite of what Say’s Law suggests.
The counter argument is the Keynsian one. Just the opposite here, Keynes theory suggests that demand will stimulate supply and growth. Right now we have — or could have — the capacity to meet greater demand. Business owners, politicians, workers, investors…everyone complains that they are sitting idle when they have assets and labor to give to the economy. Just because a factory closes doesn’t mean it is irrelevant. It is an unused factor of production, waiting for demand to justify its output. Keynes recognized this during the Great Depression and much of his macroeconomic thinking is founded in this experience.
So what do we have now? Do we have unmet demand due to a shortage of factories, workers, or capital? Or do we have idle factories, workers, and capital? Is it the case that the economy cannot supply goods and services or are we in a situation where demand fails to meet supply?
In the long run, aggregate supply and aggregate demand essentially equal one another. In a recession, however, inadequate demand limits incentives to produce. If you owned an idol widget factory, would you invest in a second factory expecting it to increase your profits? Of course not. The idea is absurd. But in essence that is exactly what Republicans want you to believe.
It probably is true that in some periods, such as the 1970s, government spending outstripped the economy’s ability to meet demand and contributed to inflation. A Keynsian approach in an economy where supply equals demand isn’t any wiser than a supply-side approach in a recession. So it is also true that you cannot forever dump money into an economy and expect it to thrive. That’s why Say and Keynes really offer opposing, but compatible, economic theories.
Anyway, we’re not in the 1970s now. That much is clear. This is a global recession with many complications gumming up the prospect of recovery. Central banks and governments promoting austerity programs foster liquidity traps, money fails to flow, consumers and business cannot access money, and economic stasis ensues. Meanwhile, economies like China pick up the slack.
It is true that they benefit from lower costs of production and regulation, but that wasn’t going to change regardless of our economic future. America simply cannot compete with the cost of labor in many manufacturing and other labor-intensive industries.
But if we attempt to compete on the labor and regulatory standards of places like China, well, we’ll become more and more like China. Our standard of living will have to fall to meet their rising standard, somewhere above the poverty of communist China and below the prosperity of capitalist America of only a few decades ago.
Is that what we want?
The United States still produces the largest economy in the world. Combined with Europe, which is similarly situated in terms of global competition with the United States, we still possess a lot of economic power to leverage. The dollar remains the preferred currency of exchange, for example. We have (now limited) monetary policy to stimulate the economy. Very simply, deficit spend. Increase demand.
Again Republicans ignorantly oppose this approach to economic recovery. They argue that government deficits are the cause of our economic malaise. No…overly leveraged banking is the cause of our malaise. No doubt government obligations exceed our ability to pay right now, but after decades of tax cuts not matched by spending cuts, American has put itself in trouble. One could as easily argue that we have a funding problem as much as one can argue we have a spending problem.
The truth is we can deficit spend. A growing economy will make repaying current and future debts more realistic. An economy that remains in recession, continues to shrink, or grows with unpredictable spurts and stutters is more of a danger than incurring more debt.
We also need regulatory reform and strategy to deal with a changing world economy. Key “non-Keynsian” issues economic our economic recovery today include a finance capitalism built on leverage debt, a shift in economic activity from old to new economies, and sovereign debt and currency concerns, especially in Europe.
In the long run, government spending to increase demand will push supply. That will create economic growth, opportunities, and jobs. When the economy is strong, then we can evaluate the virtues of macroeconomic theory like Say’s Law and supply-side economics. Until then I think it is rather obvious that these conservative approaches favor the very few at the expense of overall economic well-being.
We are in a supply-side economy now. How do you like it?
- Rethinking macro (economist.com)
- Talking Keynes, Without Listening. (rightwingnutsandbolts.wordpress.com)
- Republican Keynesians (economix.blogs.nytimes.com)
- Paul Krugman: ‘I’m sick of being Cassandra. I’d like to win for once’ (guardian.co.uk)