Wednesday, 4 January 2017

Quote of the Day: On ‘growth by deficits,’ i.e., the supply-side fantasy


Former Reagan budget director David Stockman (from his book The Great Deformation: The Corruption of Capitalism in America) writing on the modern Republican Party fantasy that is about to be tried by another new president:
“A bastardised variation of supply-side theory has been embraced by Republican politicians in the years since Reagan. They have not explicitly claimed that deficits are harmless—they have just attempted to define the issue away.
    “The argument has been that deficits are essentially the by-product of a weak economy and that the solution, therefore, is to undertake policy actions directed at growing the GDP, not shrinking the budget columns. Not surprisingly, the way to get more GDP growth is claimed always and everywhere to be through lower taxes. In due course, fiscal deficits disappear because the economy grows the revenue line back to balance.
    “The trouble with this shibboleth is that it was put to the test and failed a long time ago, during the Reagan-Bush recovery after 1982… It is not reasonable to expect a better macroeconomic backdrop than this eight-year expansion, yet spending remained close to 22 percent of GDP and revenues were at 18 percent of GDP right up to the downturn in the second half of 1990. The deficit gap was plain and simply structural—the result of policy choices, not a weak economy. …
    “So the “grow your way out” theory had been invalid from the very beginning. Yet by embracing it in the decades since then, congressional Republicans have transformed their real job, managing the finances of the US government, into a sub-branch of statist pretension; that is, centrally managing the growth of the private economy through chronic fiddling with taxes.
    “These numbers are bad enough, yet they fail to capture the more significant fiscal legacy of the Reagan Revolution. The more profound outcome was that the old-time taboo against chronic deficit finance in peacetime had been jettisoned by the Republican Party.
 
    “How can economic growth remain high and inflation low for the long run when the Administration’s policy is to consume two-thirds of the nation’s net private savings to fund the Federal deficit? …
    “The massive Republican deficits after 1980, which reached their ultimate conclusion in George W. Bush’s final trillion-dollar-bailout-nation era, had not been ‘on the level.’ Beneath the economic surface, the pernicious force of printing-press money had been gathering volcanic momentum since 1971. And it was this unprecedented monetary deformation which finally accounted for both the debt-fuelled illusion of prosperity and for the long, extended deferral of the day of fiscal reckoning… In the epigrammatic phrase of the great French monetary economist Jacques Rueff, the door had been opened to ‘deficits without tears.’ The GOP was thus relieved of the conservative party’s true calling in a modern welfare state democracy; that is, hard labour on the oars of fiscal rectitude. Indeed, with the fear of deficits gone, the GOP drifted into what amounted to Keynesianism for the prosperous classes.”
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