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New Voodoo Economics Crowding Out Clear Thinking

New Voodoo Economics Crowding Out Clear Thinking

George H.W. Bush had it right in 1980 when he labeled the claim that cutting taxes would reduce the budget deficit “voodoo economic policy.”  That didn’t stop Senate Minority Leader Mitch McConnell (R-KY) from claiming last summer that the George W. Bush-era tax cuts caused no net revenue loss — a claim that even mainstream Republican economists have thoroughly debunked.

Senator McConnell has now doubled down on his upside-down economics with his claim last week that “the excessive government spending of the last two years is one of the reasons the private sector is not doing any better than it is” and that reducing spending “is what we really need to do and do it quickly.”

Here’s what I wrote last fall, when then-House Minority Leader Boehner made a similar claim to try to justify severe, immediate spending cuts:

Rep. Boehner claims that “excessive government spending is crowding out the private economy.”  This contention makes little sense when there are large numbers of unemployed workers and substantial idle productive capacity in the private sector and when financial investors are willing to accept very low yields in return for the safety afforded by U.S. Treasury securities.

For government spending to crowd out private spending, the workers, factories, and machines needed to meet the demand generated by the government spending would have to be diverted from other productive activities.  That can occur in a high-employment economy with no economic slack.  But under current conditions, the situation is different.  For example, when the government provides additional unemployment insurance (UI) benefits to workers struggling to find a job, businesses are benefitted rather than harmed: the benefits increase consumer demand for goods and services and thereby enable businesses to put unemployed workers back to work and put idle capacity back into production (or to refrain from cutting workforces and production even further).

Neither the Federal Reserve nor financial investors buy Rep. Boehner’s argument.  If the Federal Reserve did, it would be tightening monetary policy now by raising interest rates to forestall higher inflation, which would arise if government spending were generating excess aggregate demand that put a strain on the country’s productive capacity.  The truth, of course, is that the Fed is much more concerned about economic weakness right now than it is about inflation and stands ready to ease monetary policy further, not tighten it.  Similarly, the appetite for U.S. Treasury securities among financial investors would not be there if they feared inflation or higher interest rates or if they were more concerned about the impact of current government spending on future deficits than about how weak the economy is right now.

The economy is a little stronger now than it was then, but the Fed’s main concern remains stubbornly high unemployment, and interest rates and inflation remain very low.  In short, there’s no more evidence behind this “crowd-out” argument now than there was before.

This post originally appeared on Off the Charts, a publication of Center on Budget and Policy Priorities.

 

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Photo credit: peasap via flickr

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7:06AM PST on Nov 22, 2012

Thank you for sharing.

11:27AM PST on Feb 25, 2011

McConnell is stupid, looks stupid, talks stupid. How in the world has he been reelected time after time?

7:10PM PST on Feb 2, 2011

Make the US a right-to-work COUNTRY, eliminate and outlaw lobbying and lobbyists, eliminate corporate and special-interest-group funding of election campaigns, take the vote AWAY from politicians and put it back into the hands of the citizens, outlaw all frivolous lawsuits and outrageously bloated settlements in circumstances where there was no willful negligence or intent to harm (drug side effects, accidents in medical procedures, industrial situations where there was no deliberate action to cause harm, etc), cut salaries, benefits, and expense accounts for every politician and their staff in the US, from the Fed to the local level, to reflect the actual hours and days they do any work for their constituents as well as what their work is actually WORTH to the folks who pay their salaries, and cut off all subsidies to EVERY industry, starting with the fossil-fuel producers - and you've got a good start toward getting our government, our economy, and our country back on track.

I haven't started on a plan for the SECOND week of "renovation" yet....

5:58PM PST on Feb 2, 2011

GOP must think Americans are a pack of fools.

1:23PM PST on Feb 2, 2011

Right on Susanne! And yes, the GOP is working for Wall Street not main street. If you are near an age of looking toward drawing on the money you've had (with no permission by you) taken out each and every pay check you've ever earned, then you need to reach into your pocket and pull it out and look at what you got in your hand because, it the GOP has their way, that is exactly what you will be left with upon retiring.

Dummy down folks who support the GOP agenda. Look at the forest through the trees. The bigger picture is there if you are willing to look at it, head on! Every person who supports the GOP, puts in peril his or her countrymen. Start being partriotic because your actions will affect you and your's as well as the GOP cares not one iota about any of us who fall within the middle class or poor sector.

11:19PM PST on Feb 1, 2011

G.H.W.Bush was right

11:11PM PST on Feb 1, 2011

I realize the Social Security was not an issue per se in this article. My comments were in support of the many references to Social Security that were made by other contributors.

11:04PM PST on Feb 1, 2011

Many reputable sources believe that convincing the public that Social Security is on the brink of bankruptcy was used a scare tactic. I’m sure it was a deciding factor for many people in the most recent elections. The GOP doesn't want to eliminate Social Security, they want to privatize it --and with good reason. Can you imagine how much money would be handed over to Wall St. and hedge fund managers if that actually happened? When they gladly accepted their bonus checks after destroying the financial security of millions of investors and causing catastrophic damage to the economy, they proved that they are corrupt beyond redemption and care only about themselves. These are the same people who help fund the campaigns of many Republican politicians. The Republican members of the Supreme Court not only protected but encouraged the practice of "money for support of special interests" when they ruled that campaign contributions can be anonymous. As usual, it all comes down to money --none of which finds its way to the average citizen. My mother always said that money was the root of all evil. She didn't coin the phrase, but she was right.

According to the Social Security Administration, although changes need to be made so that benefits will not have to be reduced after the year 2040, the program is in no immediate danger. You can access their report, "Status of the Social Security and Medicare Programs," at: http://www.ssa.gov/OACT/TRSUM/index.html.

8:55PM PST on Feb 1, 2011

No; actually this bad economy didn't start with NAFTA (didn't help it either) but rather, with Reagon-nomics. He broke the backs of the labor unions, gave the rich tax cuts, borrowed more money than all war-time presidents up to Nixon, combined, and tripled the national debt from nearly 1 trillion to 3 trillion dollars. Clinton actually created more American wealth and left a 250 billion dollar surplus (which Dubya ate through very quickly) and Bush (Dub) left us again, in debt.

The really big picture with outsourcing and the American people:
Jobs outsourced to Asia, India, etc.
China paying import taxes at 3%
U.S. pays approx. 28%
Unemployed Americans desperate
Republicans recognize unemployed American's desparation
Bring outsourced jobs back to America
Former desperate unemployed American workers now working
~for same wages Chinese and India workers were earning
Erybohy rear happy now (just like chinese fortune cookie say)

8:17PM PST on Feb 1, 2011

thanks.

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