Tags
COVID-19 pandemic, fiscal policy, sequester, stimulus, Supply-side economics, Tax Cuts and Jobs Act
The reality of the apparent bipartisanship on the part of Republicans to address the extraordinary impact of the COVID-19 pandemic on the economy is becoming clear. It was tokenism that deviated only momentarily from their prototypical penny wise but pound foolish fiscal policy. Republicans simply can’t make the connection between supply and demand, and think only in terms of fiscal policy that limits government spending. But they come down on all sides of government spending issues relative to the policies they support.
Following their initial stimulus in 2008, in example, the Republican-controlled Congress refused further stimulus spending, which forced the “sequester” negotiations during President Barrack Obama’s administration. In their effort to limit cuts to defense spending, they argued that doing so would result in job losses. What they seemed not to realize is what that meant, because they were all for cuts to discretionary spending that would result in job losses. Since job losses result in a contraction of demand, regardless of where they are lost, their position just made no sense, except perhaps in the context that Paul Krugman referred to as starving the beast.
Most leading economists of the time criticized the embrace of austerity for both the human suffering and its effect of creating a contraction of demand, and the recovery from the 2008 crash was mitigated only by the extent to which Obama was able to limit the austerity measures by forcing agreement to the sequester. It’s informative to note here that the cuts Republicans sought return more to the treasury [PDF] than their tax cuts.
On an aside that is not far removed, supply-side economics further illustrates the Republican lack of grasp of capitalist principles. Do not forget for a moment that the Tax Cuts and Jobs Act did not stimulate investment in productive capacity that stimulated job growth as promised, and was instead used to increase wealth. And remember too that efforts to cut spending by President Donald Trump’s administration were responsible in part for the extent of the pandemic’s effect on our lives and the current economic crisis. But put those aside for a moment, and consider an old example used in business administration courses in college that illustrates how ridiculous supply-side economics is.
If production were the key to expanding an economy, buggy whip production would be a thriving industry. But it isn’t because that aspect of economic growth critical to economic expansion, demand, is absent. Outside of the Amish community, there simply is no demand for buggy whips.
Supply-side economics has its place, but not as a measure to promote economic growth in a contracted economy. In fact, it’s a natural effect of demand in an expanding economy that industry will gear-up production and new competition will arise to meet increases in demand. Thinking of it as an element of government fiscal policy is just stupid, not as stupid as withholding stimulus in a crisis, but stupid—and stupid is as stupid does.
Charity, food banks, and policies like freezing rents and debt repayment during the crisis may meet the basic needs of those affected by the economic crash, but they do little for the economy. What the economy needs is policy that supports ongoing demand, and demand requires a supply of money. It’s that simple. Unfortunately, the Republicans seem unable to grasp the flaws in their ideology as it relates to economics, and their penny wise pound foolishness has wrought and promises nothing but misery for the nation.
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