Sunday, August 28, 2011

Defeating Bad Economic Ideas

The past decade was supposed to represent the triumph of rightwing economics—marginal tax rates at record lows, massive deregulation of the financial sector, no new environmental laws to hamper business—and the result was supposed to be robust economic growth and job creation. Instead we had a decade from which America has yet to recover. Economic growth has recently been revised downward, unemployment is over 9%, and there are increased fears of a double-dip recession.

You might think that the conservative charlatans who peddled this economic voodoo would feel chastised, and would no longer be taken seriously. Failures of this magnitude are rare, especially ones that so clearly invalidate a particular ideology. Instead the opposite has happened. The people who were so spectacularly wrong are doubling down on their ignorance, insisting that the only way out of our current crisis is to lower tax rates, lessen regulation, and cut government spending.

There is not a shred of evidence to suggest that they are right; in fact, all of the evidence points to how damaging their ideas are. But the rightwing no longer believes in evidence or facts, and even its intellectual defenders with credible expertise are left grasping for straws.

They say that businesses are stymied by a “climate of uncertainty”. This is nonsense. Uncertainty is a constant in business; new technology is always being developed, new products created, new regulations imposed. Businesses adapt and evolve; this is what they always do. Currently, corporations are sitting on over $2 trillion in cash because they don’t see significant demand to warrant additional investments. It’s that simple. Cutting back on government purchases (and government jobs) will only further reduce aggregate demand.

The economic Right also claims that increased government borrowing will “crowd out” private investment and lead to higher interest rates. Again, this is nonsense; interest rates are currently at 60-year lows, with the U.S. government able to borrow almost unlimited amounts of money for virtually nothing.

Then there were the predictions that the Federal Reserve’s quantitative easing (QE1 and QE2) would ignite inflation. The predictions were wrong; inflation has stayed below 2% annually since 2007 and there are no signs that it will exceed 2%, despite turmoil in oil markets and the rising demand for commodities from emerging markets.

As for the burden of excess regulation, very few additional laws have been enacted and no surveys of businesses point to regulation as a primary cause of the lack of hiring and expansion. Even the healthcare law, which will require new commitments by businesses, is years away from full enactment; additionally, no data indicates that concern about how the law will eventually impact business is affecting current demand.

As Paul Krugman continually notes, those who have argued against the basic tenets of Keynesian economics have been wrong about everything. But they are still routinely invited to write op-ed in major newspapers, and to appear on major television and cable news shows. (In contrast, those who argue for more government stimulus are practically shunned.)

All the data in fact indicate that the recession was much deeper than previously thought, and that the stimulus was much too small to make up for the demand falloff. Cumulatively so far, the U.S. economy has produced almost $3 trillion less in economic output than its potential. This is wealth we can never recover, leading to economic suffering that has significantly diminished the life prospects of millions of Americans. The political response to their plight has been a disgrace, bordering on criminal.

Unfortunately, the Obama Administration shares much of the blame. Not only did it predict that unemployment would peak at 8% after the stimulus passed (the worst messaging mistake of Obama’s presidency); it never focused directly on job creation, and continually oversold the tepid recovery that did occur. As I’ve discussed over the past weeks, Obama has chosen to mimic the GOP economic narrative—that deficit reduction is our primary short-term problem—when demonstrably it is not.

One of the goals of Voices of Reason is to help defeat bad ideas, and promote good ones. The idea that supply side economics and austerity are the solution to our lingering recession is one of those bad ideas. It has been thoroughly discredited by all the available data, and needs to take its place permanently in the dustbin of history.

Jason Scorse

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