Tuesday, September 25, 2012

Both Political Parties Propose Supply Side Solutions For Economic Recovery

This article (via Harry Dolan) argues that both parties are advocating supply-side solutions for an economy that is suffering from a huge drop in aggregate demand.  The GOP takes the position that there is a shortage of capital for investment.  Therefore, they want to cut taxes, primarily for the rich, in order to stimulate investment.  The Obama administration attempted a demand side stimulus but it was not enough to compensate for the drop in demand.  They found enough money to bail out the banks, but they have done little to fix the household debt problem.  Overleveraged consumers are paying down debt instead of consuming.   In the face of political opposition from Republicans, the Obama administration has been pushing progressive supply-side solutions.  Educational reform and tax credits to businesses that invest in innovation are supply-side approaches that do little to stimulate short term demand.

This analysis is mostly correct.  Republicans, however, always promote tax cuts for the rich.  They also cut taxes for the less well off, in order to make the tax cuts appear to be fair.  That is a demand side solution for an economy in recession. Tax cuts give everyone more money to spend.  They also lead to budget deficits.  The Bush administration used demand side arguments to justify the Bush tax cuts in the 2001 recession.  The GOP congress was not concerned about budget deficits with a Republican holding the presidency.  When Obama took office they became deficit hawks.  They, and their friends in the media, shifted attention from solving the problem of high unemployment, to the problem of short and long term deficit reduction.  Unfortunately, this was a successful strategy.  The Obama administration was forced to address the deficit problem at the same time that it was attempting to fix the short term decline in aggregate demand.  It has tried to cut back on federal spending in order to appease the deficit hawks.

Since the GOP always advocates tax cuts for the rich, that is not their favorite supply side argument today.  They argue instead that businesses are not investing because they do not have confidence in the policies of the Obama administration.  Romney claims that business confidence would return if he were elected to office.  He would cut corporate taxes, and he would continue with the GOP policy of government deregulation.  They accuse the Obama administration of over-regulating the economy.  That has been a successful argument despite the fact that it is not true.  Many believe that Obama has failed to provide the regulations that are needed to prevent another banking crisis.  He has also cut back on his efforts to promote environmental policies that he advocated when he ran his campaign.

Both parties favor education reform as a supply side solution to our economic problems. Its hard to be against improving education.  Unfortunately, educational reform will do little to fix the short term problem of insufficient aggregate demand.  It is much harder to change the economic system, and some of our unemployment problems are related to changes in the economy that have led to job loss and falling wages.  Neither party will address those problems.  Moreover, both parties support educational reforms that promote the interests of those who would like to privatize the public education system.  The GOP has promoted the use of school vouchers as well as charter schools.  The Obama administration has also supported charter schools, and it does little to deal with the emergence of fraudulent for-profit colleges that have been enabled by access to government supported student loans.  A large percent of the students that they admit fail to graduate and many who do graduate are unable to find the high-paying jobs that they are promised by recruiters.  They end up with debts that they cannot service and the government is stuck with the problem of debt collection.  The privately operated colleges, on the other hand, are highly profitable and their executives are earning million dollar incomes.  Our real problem in higher education is that it is becoming unaffordable to many Americans.  Government supported colleges and universities have had to increase tuition and fees as funding from government has substantially declined over the last decade.  Students and families have resorted to student loans to finance their education.  The debate between the GOP and the Obama administration has not been about the decline in government funding.  It has been about the level of federal subsidies for student loans.

This article makes the point that both parties are doing less than what is needed to deal with high unemployment.  The GOP is a big part of the problem, but the Democratic party is also part of the problem.  The decline in union membership in the US has limited the influence of labor in politics.  The Democratic party has been forced to compete with the GOP for corporate campaign contributions.  It has also had to deal with changes in the media that has favored conservatives.  The development of cable networks has provided the GOP with its own news network.  Talk radio is dominated by conservatives as well, and most newspapers are conservative.  Forty years ago most Americans identified themselves as liberals.  Today most call themselves conservative.  The Democratic party cannot create public opinion.  It has to run elections with the odds stacked against them.

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