THEY’RE ALL KEYNESIANS NOW

1/7/08

A story surfaced late last week, and gained momentum over the weekend, that the free market Bush administration is putting together a package of tax cuts to stimulate the economy with the help and advice of none other than Martin Feldstein, former chairman of the Council of Economic Advisors, current president of the National Bureau of Economic Research, and lifetime proponent of the “economy as a big machine that responds precisely to the proper inputs” school of economics.

This time, the administration is not even trotting out its supply side rhetoric but is admitting that the purpose of these tax cuts is to put cash into people’s hands to spend in order to ward off recession. Even though the administration’s idea is to give the economy a jolt just in time for the November elections, it is doubtful that the Bushmen will get much opposition from the Democrats, who rarely shrink from an opportunity to put your cash into other people’s hands and take the credit for doing so.

Recall that the origin of our current economic problems is excessive borrowing (in the form of mortgages and other consumer credit) and spending by consumers and the final realization that, by golly, we have to actually repay the money we borrowed and, gee whiz, we don’t have it. So what the administration is proposing is to solve the problem of excessive spending by encouraging more spending.

I hate to be in the position of opposing a tax cut, but this one is clearly wrong-headed. What the economy needs is not a temporary spending jolt, but a fundamental reexamination on the part of the American people of their approach to money. For too long, we have treated money as a perishable commodity, to be spent in a hurry before it spoils. We have forgotten that saving a portion of our money is an option, indeed, a necessity both on the micro and macro levels. We have gone as far as to denigrate saving as at best useless, at worst some sort of masochistic exercise in self denial. Indeed, the Keynesianism on which the free market Bush administration’s tax cut is premised (though no Republican would ever admit that Lord Keynes’ thinking is behind this plan) can easily be construed (some might say, legitimately, misconstrued) as treating savings as some sort of deadweight loss for the economy. While most Americans would not recognize the name of John Maynard Keynes, they surely share his enthusiasm for spending.

The only way to address our current economic difficulty on anything approaching a long term basis is for people to wake up to the necessity of saving. Giving them more money while telling them they are not spending enough is worse than counterproductive. The fundamental reexamination we need as a people will come only when we are made to feel the economic pain our policymakers have been striving so mightily to have us avoid. Forget the band-aids and the bromides; let this thing run its course, let the free market do its job. It will be painful, but necessary for our long term survival as an economy and as a people.