Dems (and Obama) Are Losing the Economic Argument: They May Also Lose the Economy

Winning the economic argument provides both space to forge effective policy and time for that policy to work. Instead, the Dems and the Obama administration are, perhaps unwittingly, reinforcing Republican myths that have dominated economic discussion for decades.

The economic crisis provides the opportunity for ridding the airwaves of these myths. The administration and Congressional Dems should begin, immediately, to cease-and-desist from characterizing the tax cut portion of the economic package as playing a significant role in stimulating the economy.

It will not. To the extent that anything is "provable" in economics, there is good evidence against a significant stimulus role for tax cuts.

First, we are already in the tax cut mode. This economic crisis occurred with the "Bush tax cuts" firmly in place.

Secondly, if further tax cuts were able significantly to stimulate economic growth in these times, the "tax cut" provided by the precipitous fall in gasoline prices from $4/gallon to less than $2, approximately a $300 billion "cut" in obligatory, recurrent, household expenses, would have had this economy purring or at least recovering. It has not. True, the economy might even be worse, but there is little evidence of a substantial stimulatory effect of the tax cut equivalent of plunging gasoline prices.

Middle class tax cuts have an intrinsic rationale unrelated to economic stimulus. Wages have not kept pace with productivity gains so that the wealthy have reaped a disproportionate share of the economic pie that, in turn, has strapped the middle class. Prosperity cannot return and be sustained without a strong middle class. That is a sufficient basis to support Obama's middle class tax cuts.

"We won", "get over it" are statements of political power, not economic wisdom. The change-we-need is accurate analysis and effective communication uncowed by rightwing rhetoric. By shifting the debate from wishful thinking to sound economics, prospects rise for effective policy decisions now and in the future, and doing the debate right is as important as the policy itself.

For the last 30 years, Democrats have become all bollixed up when discussing taxes. As soon as the Republican minority offered tax reductions as a stimulus package, Democrats began choking like George Bush chomping a pretzel. Part of the blame for their apoplexy is that the Obama tax relief proposals are included in the Democrats' stimulus package, and thus rhetoric about stimulus is conjoined with those cuts reinforcing the Republicans' framing. Bad strategy.

It would be far wiser, and lead to a better bill, to discuss the stimulus portions of the bill on economic grounds and the inclusion of tax cuts as a legislative strategy to deliver much-needed relief for the middle class that the President promised during the campaign.

Months ago, just as this crisis dawned, it was these pages that first explained that in a major "contraction" as we are experiencing, massive public investment in projects that would improve the economy's efficiency once recovery occurred is the only remedy. ("Wanted: A Good Keynesian. Massive Public Investment Will Fix the Economy", October 13, 2008) Private demand is collapsing so that public demand (i.e., spending) must substitute to keep people working, factories producing, mortgages and college tuitions met, and the overall fabric of society from disintegrating.

Although overlooked at the time, this precept became the animating force behind the size and scope of the stimulus package. Obama et al. need to return to it.

And, as the article noted, there is strong proof (and here it gets closer to scientific validity) of this proposition.

For the last half-century, Republicans have been genetically unable to accept that the New Deal worked. To do so would mean that government action in a free market economy played an important counter-cyclical and regulatory role. In the face of that criticism, Democrats rushed to extol the virtues of their icon, Franklin D. Rooosevelt.

Here's the truth, and it was presented in the October 13th article. The New Deal did work. From 1933 to 1936, unemployment fell from 25% to 14%.

Then, FDR screwed up; he abandoned the New Deal. Having come to Washington as a dyed-in-the-wool budget-balancer, he decided that the economy was improving and it was time to balance the budget again. Result: unemployment rose until the needs of the Second World War created full employment. That is, private sector demand had not yet fully recovered when FDR balanced the budget, and the decreased government spending (public sector demand) contracted. Q.e.d.

If the Republicans need it for their psyches, let them critique FDR. But, the New Deal worked, and the country will be marched down another foolhardy path if it fails to recognize this lesson, and allows mythology to continue to set economic policy for the sake of comity.

The massive deficits this public investment will bring, to be paid by the next generations, can be justified if those investments improve the economy's efficiency for the long run so that those future generations benefit: cleaner/renewable fuels, public transportation, roads-bridges-tunnels, medicines to reduce long-term health costs, digital connectivity, and so on. Think of the Grand Coulee dam in Washington State as a New Deal example that still provides electricity to the area (Washington State generates 80% of its electricity from hydroelectric, so Grand Coulee also fits the 21st century imperative of clean, renewable, home-grown energy...not a bad investment for 50 years ago, for which the New Deal was entirely responsible!)

President Obama's new Commerce Secretary choice, Judd Gregg, may have provided a springboard for the the administration and Congress (and the so-called "strategists" who appear on TV) to get back on track.

On CNBC, he slapped down Larry Kudlow, the supply-side siren, by repeatedly telling an increasingly apoplectic Kudlow that in times of contraction the only entity willing to spend and stave off deflation is the federal government.

Kudlow could not believe his ears: was Gregg a, a, a Keynesian?


John Maynard Keynes was the economist of the Great Depression. His insights applied, and apply, with great specificity to major economic downturns. Much like the laws of physics do not apply to the first trillionth-trillionth of the second after the big-bang, the economics of contractions are not the same as the policies one might apply in periods of growth.

Bipartisanship is useless if it does not produce sound policy. The way to achieve it is not to cave to harmful policies, but to explain to the country, like Judd Gregg did to Kudlow, over the heads of Congress, (and over the heads of the permanent yapping class that takes up residence in DC to set forth misleading policy statements cloaked in the aura of erudition) very clearly just what, and why, the public spending investments are both stimulative and useful, and the separate rationale for middle class tax cuts. By generating public demand, Republican votes will emerge.

Use the bully pulpit. Use charts, graphs. Reference history. We can take it. Everyone is affected, and the whole country will listen.

If Obama confuses sound policy with bipartisanship, he will lose the economy.

Let the discussion begin, anew.