As someone with a double major in Economics (focus on money and banking) and Political Science (focus on US politics) and a minor in Public Policy, the economic collapse and subsequent attempts to fix it are somewhat in my academic wheelhouse. Keeping that in mind, here goes…
Congress really screwed the pooch here. If there was ever a time to make a firm line in the sand on an issue, it is now. The simple truth is that the GOP economic orthodoxy does not work. Now, let’s be clear that the GOP ideas are not the same as conservative economic ideas- there is some good there in the big picture.
The fundamental problem is that that a true stimulus needed two core things:
1. It needed to be sufficiently big to work
2. It needed to have a relatively small proportion of the bill be tax cuts.
The reasons for this should be somewhat clear- the GOP has clearly decided to put their short-term (and likely long-term) political viability into fighting the Democrats’ view of a stimulus package, and as stated before their ideas don’t work. As such, it is illogical to believe that they will become more amenable to future stimulus over time, which necessitates making the stimulus part of the gigantic amount of legislation to fix the mess sufficently big so that we won’t need to try to push another one through with all of the other political landmines that need to be handled this term (massive economic re-regulation, foreign policy, etc). The fact of the matter is that tax cuts are simply less effective than spending to fix problems in a recession- it was true eight years ago and it was true eighty years ago. The beauty of economic investment is that you can put the money into jobs that cannot be sent abroad, which means the money will go to US citizens, most of whom do not have the ability to save, so all their money will go back into the economy, largely to more people that can’t afford to save it, so the cycle continues. Effectively, the point where the multiplier stops is where a person can choose to sit on the money, because while saving money can yield positively for the economy, it is not nearly as good as a spending loop because the ceiling of benefits is high, especially when banks are run by buffons.
Keeping that in mind, it should be somewhat easy to see why tax cuts are less effective: they give money to people who aren’t going to spend it to a much larger degree (reducing the multiplier) AND people’s spending habits are not changed as positively with tax cuts as they are with actual money in their pockets. The argument can be made that some/many businesses do this in a way that affects things on a macro level, but it is wholly less effective than spending the money. Plus, spending goes to things that we can actually use, whether that be infrastructure work like fixing the electric grid, green energy like solar farms, and even old-school spending like roads and bridges. Not only do those things keep the money cycle going- they produce “things” that help our efficency and ideally our emissions as well.
Here’s a chart (grabbed from Jed L over at Kos) from the CBO estimating multipliers:
Now, the GOP philosophy would have some grounding if there was some reason to believe that the high level people at the major economic institutions (banks and whatnot) were competent and/or interested in the long term. However, this is so blatantly not the case that it is an irrelevant logic. In a way, it reminds me of if someone said “Michael Jordan? He was the best player of all time- of course he can run the front office of an NBA team! I know he messed up Washington so badly that it took their team years to recover, but he’s MJ!” The definition of insanity is trying the same thing and expecting a different result, and that’s what a stimulus stacked with tax cuts is.
So where do we go from here? Assuming the Democrats (particularly President Obama) don’t grow a spine and put some competence in this bill, the next step has to be economic re-regulation. It is an issue that makes current Congressional Republicans look stupid(er than usual), and is one with gigantic political will behind it. After that, hopefully Dems will have the political capital to either fix health care, eliminate the income cap for Social Security (easiest fix to a major problem we have), or do a stimulus that will actually work.
Maybe then we can have some people in power with spines.