Voodoo Economics, Fiscal Policy Voodoo and QE Voodoo

This article briefly mentions that voodoo economics of the Reagan era as if it is history. Unfortunately zombie's do not die. It is being revived in the Ryan plan which implies that tax cuts to the wealthy will lead to an economic boom. The conservative Heritage Foundation was glad to provide the "research" behind the Ryan claims. After all, it is funded by the super rich to provide research to benefit the super rich.

The major portion of this article was devoted to an explanation of quantitative easing and a rationale for explaining why pumping more money into banks won't cause them to lend more freely because of their solvency concerns, and why heavily indebted households won't take advantage of the increased money supply to borrow and spend.

Fiscal policy is usually invoked to deal with the limitations of monetary policy. Government will borrow and spend to compensate for the reluctance of business and households to borrow and spend. Our recent experience with fiscal policy shows that it cannot work as long as it is left up to Congress to implement.

The article does not discuss one of Keynes's less often cited solutions to recession. He argued that income inequality was one of the problems that lead to recession. The super rich can't spend all of their income so they invest in ways that do not expand the economy. Today they invest in private equity which purchases a weak business and extracts value out of it before putting it on the market for someone else to fix (Chrysler is a good example). They also invest their money with other schemes that extract value by making bets on currencies and other securities. This is a sum zero game in which some investors make better bets than those who made poor bets and lose their money.

This gets us back to the basic problem of income inequality. Low growth in middle class income as we have experienced for the last 30 years has led to a situation in which growth can only be sustained by the assumption of household debt. If we focused on changing this dynamic we would not need Voodoo economics in each of its forms.