The world faces an unprecedented recession, that could easily spiral into a deflationary rot from which it is very hard to escape, but politics is muddling the necessary response. This is becoming untolerable, so much so, that we have to suspend our political neutrality.
Simple economics: When there is a $2 trillion shortfall between what the economy can produce and demand for it’s goods and services, the rest of the world also faces strong downdraft (no help from there), and monetary policy has largely ran it’s coarse (interest rates under it’s control are already close to zero), what can policy makers do?
Simple. There is one instrument left, large Federal spending. But the Republican party, worried about budget deficits they themselves created are fighting a rear end obstruction campaign arguing, falsely, that tax cuts are more efficient.
There is simply no evidence for that, in fact, the economic evidence argues that:
- Federal spending is more efficient as a significant part tax cuts will be saved
- Therefore, Federal spending has a larger ‘multiplier’, leading to more jobs and incomes, and hence the burden on future debts is actually less.
We’ve seen bogus entries from the likes of Russ Limbaugh and Karl Rove, the latter might have been a brilliant political strategist, but we are unaware of his economic qualifications (he dropped out of college, actually).
John McCain (who was on the receiving end of nasty Rove campaign in 2000) argued:
- Sen. John McCain criticized the bill and its writers for keeping Republican ideas out of the original House version. [Moneynews]
Perhaps that is not such a bad thing, as the Republicans simply do not have economic science behind them on this issue.
You can hear from the recent Nobel price winner in economics here instead. At least he knows what he’s talking about..