A Liberal Lecture on Economics (and Why It Won’t Work)

posted at 2:00 pm on July 12, 2009 by The Other McCain
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The editors of The Washington Post demand to know why a second economic “stimulus” is needed. Dean Baker of the liberal Center for Economic and Policy Research hinges his reply on this analysis:

The collapse of the housing bubble led to a reduction in annual rates of construction of about $450 billion. The bubble in the non-residential sector is also in the process of collapsing, cutting annual demand by approximately $200 billion. The loss of $8 trillion in housing bubble wealth, coupled with a loss of roughly the same amount of stock wealth, is leading to a reduction in annual consumption of approximately $700 billion.
The total loss in demand is around $1,350 billion. The annual stimulus in the bill approved in February was around $300 billion. $300 billion in stimulus is not nearly enough to fill a $1,350 billion shortfall in demand.

Only a Keynesian could waltz past a tremendous fact like the loss of $16 trillion in asset value — Baker’s estimate of the combined losses in real estate and stock markets — to obsess about the “shortfall in demand,” which is the exclusive focus of his argument for a second “stimulus.”

CAPITAL SUPPLY, CONSUMER DEMAND AND ‘STIMULUS’
The fundamental problem of the U.S. economy is a capital shortage, and you can’t make capitalism work without capital. We have a supply-side crisis to which liberals are proposing only demand-side solutions.

I keep repeating, “It Won’t Work,” and here’s why: The government can print money or borrow money or raise taxes to increase government spending in the name of pump-priming “stimulus” — that is to say, demand-side intervention intended to boost consumer spending. (Whether or not the $789 trillion “stimulus” bill passed in February effectively achieves this intent is another question.)

However, any of these three methods of funding Keynesian intervention has negative economic consequences that hinder recovery. Obviously, raising taxes reduces the amount of money that citizens have available for spending or investment. Printing money — i.e., inflation — has ruinous effects on consumers and investors. And if the government borrows money (which has been approach used to fund the “stimulus” so far), it thereby siphons away capital that might otherwise be available to private-sector investment.

This third point — the negative economic consequences of deficit spending — is where the hypocrisy of Democrats is so apparent. All during the Bush years, Democrats harped about deficits, but now that they’re in charge, their pretenses to fiscal conservatism have evaporated. It’s sad, because the fiscal and monetary policies of the Bush years (especially the inflationary policies of the Fed) deserve serious criticism, not the kind of political opportunism that Democrats practice.

TOWARD AN AMERICAN ‘LOST DECADE’
As Reason magazine recently reported, the Obama administration’s “stimulus” approach is almost an exact duplicate of the policies that led to Japan’s “Lost Decade”:

The Japanese government’s easing of credit rates, instead of spurring real demand, created artificial demand. Federal loans and stimulus spending were not economically productive, and they vastly increased the nation’s debt and prolonged the economic malaise. Worse, businesses spent critical time on the sidelines, waiting for government bailouts and other centralized actions, instead of speedily consolidating their losses, clearing their balance sheets of bad investments, and reorganizing.

So Baker’s spat with the Washington Post over the need for a second “stimulus” is a pathetic sideshow. The first “stimulus” is, in fact, damaging the prospects for recovery and the debate over a second dose of the same poison is basically about whether we should commit economic suicide faster.

Liberalism’s implacable hostility to market economics — their attacks on investment and profit, in service of their politically motivated demonization of “the rich” — is one of those ideas that has consequences. Everyone with a 401(k) account has suffered directly from the collapse of the stock market. Measures that prevent recovery will only prolong the misery, and one investment manager summed up the current situation Friday:

“Nobody’s investing because there’s no reason to invest,” said Dawn Bennett, CEO of Bennett Financial Group.

Exactly. If companies can’t make profits, what’s the point in buying stock? But the government is now controlled by liberals who want us to believe that corporate profits are evil, and so the prospects for investment are bleak. “Investment” is just another word for “capital,” and you can’t make capitalism work without capital. As Michelle Malkin said in September 2008, The Fundamentals Suck.

This post was promoted from GreenRoom to HotAir.com.
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