Republicans and Deficits

I don’t want to wander too far into the purely political realm, but I am beginning to get annoyed at the Republican party and its attitude toward deficit spending.

It’s one thing to be an ardent fiscal conservative and abhor deficits. That I understand. It would be very bad economics in the depths of a recession and even worse in a depression, but it would be a coherent position.

But it is quite another to announce as some leading Republicans are now doing that they are opposed to the current administration’s stimulus package because it increases the Federal deficit. My confusion and annoyance stems from the simple fact that the largest non-wartime deficits in American history have been those of Reagan and the most recent Bush. I recall the Republicans telling those who criticized running up the deficits in peace time that the tax cuts ‘would pay for themselves’ due to the stimulus they would create and the subsequent increase in tax revenues we would collect. We were also told by none other than Dick Cheney, a Republican I believe, that ‘deficits don’t matter’. So why is it that Bobby Jindal can go on TV and say he hopes Obama fails because the stimulus package creates a deficit and Republicans object to spending more than we take in? Are we not to notice the budget numbers for the past eight years?

It used to be that the Republican economic dogma bore a vague resemblance to standard Chicago School economic theory. Milton Friedman and his successors at Chicago developed the dominant form of economics – that kind you find in the standard textbooks – which has a decidedly ‘free market’ bias to it. The fit with old fashioned Republican ‘individualism’ was perfect. But with Laffer and his heirs the link with the textbook was broken and the GOP wandered off into a parallel universe where deficits created by massive tax cuts are OK, but deficits created by government programs like unemployment insurance, are wicked.

To be fair it isn’t just the Republicans who have their underwear in a twist at the moment. The Chicago School is under attack too. The most recent form of Chicago economics developed by Bob Lucas tells us that fiscal policy, i.e. running a deficit, won’t work because consumers are rational: they will realize that the near term deficit merely means medium term increases in taxes so they will save more to offset that future tax bill. The implied reduction in consumption, according to Lucas, will, exactly offset the increase in government spending and, consequently, negate any stimulative effect it might have had. This ‘Lucasian’ theory displaced Keynesian theory and became the dominant approach at the Federal Reserve Board and Treasury department. The pervasive adoption of Lucasian economics explains why, even now, getting a consensus amongst economists to support massive government spending has been difficult. The Chicago folks are fighting a fierce intellectual rearguard action which helps explain the ferocity of the criticism people like Paul Krugman [a committed Keynesian theorist] gets from erstwhile colleagues in academia.

The point of my short foray into the internecine struggles within economics is to bring to the surface that the Republicans are losing their intellectual legitimacy. To the extent that they relied upon Friedman and Lucas to provide heft to their ideas, they will now need to search for something else. This might explain why they sound so hapless currently. They are adrift and out of step not just with the country’s emotional center, but with their notional intellectual roots.

Time for some new ideas?

Or, at least, less of the hypocrisy that has been so annoying lately.