Stimulus Redux and Faux Fiscal Conservatism?

Apart from the hard core rump of the Republican party and various libertarians, right wingers, and sundry whackos such as neoclassical economists, there is a quiet, but discernible, level of support for further stimulus should it be required. Even Nancy Pelosi, not one of my favorite politicians, agrees that something extra might be needed. Meantime she urges us to wait:
Pelosi is open to another stimulus if economy needs more – MarketWatch

As you know I have thought all along that the original stimulus package was far too small. Most of the economists who favor stimulus agree with this position. It was a failure of politics, not economics, that forced the final package down to $787 billion.

Even that amount, which sounds very large, was too small by about $500 billion. Plus it included a substantial number of tax cuts that will have very marginal stimulus value. The main part of the tax cut is being organized right now with checks being prepared and wage deduction tables being readied for action on April 1st. So most consumers will receive tangible evidence of the government’s efforts to fight the recession relatively soon. Unfortunately most are likely to set aside the cash as savings – don’t forget that debt pay downs are a form of savings too – and so will not stimulate demand which is what we need. My own preference was to send out cash cards with the tax cuts so that the cash had to be spent within a certain period. This would have increased the marginal amount spent rather than saved and thus increased the efficiency of the stimulus plan.

Already the political focus has begun to shift to the administration’s budget, with a core of conservative Democrats trying to cut it back severely. The opposition is rallying around the notion of fiscal conservatism: the budget was ambitious and coupled with the stimulus plan and various financial system bailouts is likely to drive the national debt to its highest levels since the end of World War II. So spending is quickly becoming an anathema.

I frankly find this odd.

For almost thirty years, since Reagan plunged the country into record deficit spending, Congress has largely ignored fiscal conservatism. In particular the Republicans have transformed themselves into a high spending party. Throughout the last three decades all the big increases in spending came from GOP policies, and all the true fiscal conservatism came from the Democrats. So for the right wingers suddenly to scream ‘stop’ is a tad annoying. It is their debt that is the encumbrance not Obama’s.

Why is this?

Because the debt incurred during the Reagan/Bush era was not focused on infrastructure or economic stabilization. It had no investment properties at all. It was aimed at transferring wealth from the future back into the hands of today’s voters as a method of winning electoral support. It played no part in restoring our roads, our electrical grid, our energy independence, our schools, or even our financial system. It was simply for consumption.

To the extent that the GOP has saddled us with massive levels of national debt, sufficient to cause some Democrats to pull back from executing Democratic policies, then it was a spectacular political success. That this was a part of the strategy has been known for a while. ‘Starving the beast’ was a well worn phrase around conservative think tanks in the height of the just ended era. By running huge deficits the conservative objective was to leave a mountain of debt as a bulwark against the introduction of liberal policies. Indeed the ultimate goal was to bankrupt government sufficiently that the central parts of the New Deal – Social Security and Medicare – could be legitimately attacked as unaffordable.

That some erstwhile centrists are now baulking at Obama’s budget shows how close the conservative movement came to its final goal.

And it helps those of us who want to see a fairer distribution of government activity and wealth within society focus our own minds on the task ahead. Some of the most staunch opposition to Obam’s budget will come from within the Democratic party itself.

I have argued here before that I think capitalism and democracy are in constructive tension with one another. They can each destroy the other. Yet each best flourishes in the context of the other. Rampant capitalism can lead to extreme wealth distribution and economic instability. The last three years are ample evidence of that. Rampant democracy can stifle capitalist creativity through an excessive zeal to redistribute wealth downward. Neither of these situations is either politically stable or healthy. Both need to be avoided. The Reagan era brought us close to the edge of a breakdown in the central social contract of America: as long as the great number of Americans experience economic security and growth then they will, in turn, tolerate the excesses of capitalism. The recent sudden populist turn against ‘greedy’ Wall Street incomes shows just how easily the majority can be roused against the capitalists if they think the contract has been violated.

My point is simple: focusing on so-called fiscal conservatism now is to perpetuate the Reagan illusion. The most urgent task ahead is to restore the social contract and get Main Street Americans secure. That means fixing long ignored issues like the cost of health care, education, and retirement. These things will cost money because they have been neglected so long. But that cost is justified because of the restoration of fairness it implies. Inevitably the debt will grow. But without that debt growth the contract cannot be restored and America will edge closer to a more populist and volatile political future. Once the great mass of Americans feel secure fiscal policy can be used to balance budgets and reduce the debt.

This reasoning is why I get annoyed at Democrats who stand in the way of the administration’s budget. Their objection is based on false economic reasoning; it is politically naive; and ultimately perpetuates Reaganism.

They should know better.