So, I see a lot of Republicans emphasizing debt reduction and reduced spending in order to help the economy. I don’t understand how this argument works in theory. I’m not just saying I disagree with it. I don’t understand how recovery is supposed to follow from reducing govt. spending at all. What’s the supposed connection? Is it a confidence claim: that people are scared because of the deficit? I doubt most people even think about the U.S. deficit when deciding whether to spend money or save or whatever. I could be wrong.
So it’s just a way to lower taxes down the road, they think? Taxes are already as low as they’ve been in forever (as a percentage of GDP). But they want to lower it further, and they see debt reduction as the way to do that?
Unfortunately, Republican reasoning does not extend any further than this. They really are not interested in improving the economy. The real goal is simply to reduce their tax burden.
Another commentator put this quite concisely: “the Republicans argue that increasing taxes by a dollar hurts the economy, while cutting spending by a dollar helps the recovery. That means they believe that taking a dollar out of a rich person’s pocket through taxes hurts demand while taking it out of a poor person’s pocket by cutting unemployment insurance doesn’t … there’s not a whole lot of evidence to support this claim.”
The actual theory is that government borrowing has a “crowding out” effect which drives up interest rates. That makes private borrowing more expensive, which makes investment more expensive, which means businesses will invest less.
Since interest rates are near historic lows that theory doesn’t hold much water in the current situation.
In actuality there is no economic theory undergirding the current GOP position. It’s a combination of protecting the interest groups they care about and hurting the President and that’s it.
I’m sure there’s also some good old fashioned Fiscal Responsibility in the mix, after all, whenever I hear just how large my country’s debt has gotten I can’t help but feel that much like a responsible person, Government should spend what it has, not what it can put on its CC.
That’s the theory from economics. Like I said, it’s not one the GOP is particularly applying because (as we both point out) the current conditions indicate that there’s no crowding out happening.
Like I said, the reason the GOP claims to want deficit reduction is a combination of protecting its favored interest groups & screwing the President. Note that they’ve rejected every compromise that the Democrats have offered.
I really think that the thought process is as simple as equating the situation with your own personal situation, i.e. if you are spending almost half of your take home pay on just paying the interest due on your desk drawer full of credit cards, you are in a really bad financial situation. There is a belief that the debt is snowballing, and will eventually overwhelm the country. The connect is then that this is just a bad overall economic situation, and thus makes for a weak economy.
That’s the best I can assess from what I read/hear. I don’t think anyone argues that having a huge debt and having to spend almost half of the national income on debt is a good thing, but I don’t think the direct linkage from current debt to jobs has been made, or even attempted.
This is more of a long-term goal, though. Short term there seems to be no benefit to the economy by practicing austerity. In fact, I’d say the reverse is more likely to happen. As the government cuts spending, it will eliminate jobs in both the public and private sector in the short term. Since unemployment is still a serious problem, I don’t see how the government removing trillions from the economy will be a positive in the short term.
One of the vague points I’ve heard bandied about is that austerity will give businesses more confidence in the government and that will boost the economy. Sounds more like armchair psychology than economic policy to me.
And even if this were true, it is not consistent with Republican talking points. They clearly preferred to continue the uncertainty of the Bush tax cuts over permanently eliminating them for the wealthy and enshrining them for the rest.
Yeah the GOP is largely taking sound theory and being sloppy with their wording to convince the base that what they really want is sound theory in action. For example, they present “increasing taxes” and “cutting spending” as two sides of the same coin when they are not. In long term macro-econ they theoretically have the same net effect, but they are not the same thing in practice.
The lack of crowding out effects is a good example of why.
I think JeffL is right about how the average Republican voter sees the situation. I see comments all over the web comparing govt. to a household budget. That’s a really silly comparison though, since a state is nothing like a house (sorry, Locke!). I have pleaded economic ignorance many times (and proven it many more!) on this forum, but even with my ignorance, I know that the analogy is bad. The comments that use it read like envy, oddly enough. The complaint is that it isn’t fair, almost like being mad that your neighbor gets a new car and you don’t.
In any case, I can understand why we should try to cut the deficit. What I don’t get is why spending cuts are the only way to do so and why fixing the deficit is supposed to have any affect on the economy, which is the key goal, right?
We’ve had long shouting match threads about this before, but the summary version:
From 1930 to 1960 the US is ruled by a coalition between southern white supremacist Democrats, what is more-or-less today’s economic liberals in the form of old-time progressives, and a broad middle of voters who think the government spends their money well.
Previous to 1960 or so the white-supremacist faction of the Democratic party is perfectly happy to support a mild welfare state because it’s almost entirely for their benefit.
Around 1960 programs get created that benefit all poor people, not just white middle class and poor people. At the same time the southern political structure collapses. Both scare the shit out of southern whites.
Vietnam and the social revolutions destroys the confidence the broad middle has in government competence.
White southern voters keep voting for the party that says they won’t spend money in ways that benefit black people - but now that party is Republicans. They’re also way more panicky and scared than before.
The combination of pre-existing Republican dislike of taxes and government spending, Reagan tactical movements on deficit-financed tax cuts, and the pre-existing views of the southern faction lead to a self-reinforcing cycle where Republican opinion leaders become ever less educated, more ideological, and more willing to believe the stage notes instead of just saying them.
At this point it’s a belief independent of anything, but I think that’s how it got started.
In many ways, addressing the debt is a measure designed to avoid future issues.
For instance, it’s at the forefront of our minds now that groups like Moody’s and S&P are chatting up the idea of reducing the rating of US debt based on this possibility of default, and we know the reasons why such a thing would be bad, right?
Well, if you recall a few months back, those same groups were chatting about reducing the rating of US debt back then too… but for a different reason (well, kind of the same reason). The idea that the government was just taking on more and more debt, makes a potential customer for that debt a lot more wary… because, at some point, the debt will be so high that the government will default, really whether it wants to or not. Eventually, folks will say, “Ya… I don’t think you’re gonna be able to pay me back, so I’m not interested in loaning you money. Sorry.” And then the house of cards comes crashing down, because you can’t borrow more money, and can’t pay for the old loans, and then you default… which results in the same kind of thing that we see with the potential default now.
So, the idea of reducing the debt isn’t meant to directly improve the economy, but is rather meant as a measure designed to prevent catastrophic problems down the road if spending continues to grow.
DarthMasta has the right of it: it’s a religious axiom of the Right–you don’t need evidence to believe axioms, they’re assumed foundations on which you build further.
The official “crowding out” theory isn’t supported by the evidence right now, but no matter.
Another axiom of the American Right (apart from how [income] taxes are sin/theft) is that federal spending as a percentage of GDP should never rise above a certain level, because apparently if it gradually goes from 20 to 30% say, we’ll soon wake up to a Nineteen Eighty-Four style gray Stalinist totalitarian dystopia, where it’s gloomy and overcast all the time to boot. However, agglomerations of market power by large private corporations (always lobbying the state for special treatment that allows them to consolidate their positions), to the point that they become oligopolies/monopolies and thus don’t face serious competition that keeps them honest and prevents them from reaping monopoly profits? They’re just fine. Trust-busting is just envious “class warfare.” Want to block the ATT/T-Mobile merger? “You’re stifling innovation!”
The doctrine of the public “countervailing power” to large corporations is long out of fashion.