Saturday, November 08, 2008


From the New York Times, Nobel Prize winning economist Paul Krugman makes suggestions for President Elect Obama's upcoming economic program:

The Obama Agenda

Now, the Obama administration shouldn’t emulate the Bush administration’s habit of turning anything and everything into an argument for its preferred policies. (Recession? The economy needs help — let’s cut taxes on rich people! Recovery? Tax cuts for rich people work — let’s do some more!)

But it would be fair for the new administration to point out how conservative ideology, the belief that greed is always good, helped create this crisis. What F.D.R. said in his second inaugural address — “We have always known that heedless self-interest was bad morals; we know now that it is bad economics” — has never rung truer.

And right now happens to be one of those times when the converse is also true, and good morals are good economics. Helping the neediest in a time of crisis, through expanded health and unemployment benefits, is the morally right thing to do; it’s also a far more effective form of economic stimulus than cutting the capital gains tax. Providing aid to beleaguered state and local governments, so that they can sustain essential public services, is important for those who depend on those services; it’s also a way to avoid job losses and limit the depth of the economy’s slump.

So a serious progressive agenda — call it a new New Deal — isn’t just economically possible, it’s exactly what the economy needs.

The bottom line, then, is that Barack Obama shouldn’t listen to the people trying to scare him into being a do-nothing president.

More here.

What Krugman is describing here is a big return to Keynesian economics, the paradigm that ruled US economic policy for a couple of generations. The stagflation of the 70s however, recession coupled with inflation, caused by LBJ's Great Society domestic programs combined with Vietnam War military spending and dramatic OPEC created oil price increases, was a problem unforeseen by Keynes, and his point of view was replaced by the current failed neoliberal model.

In political practice, one of the biggest parts of neoliberalism, as observed by Krugman, is cutting taxes for the rich. Once upon a time, this was actually effective, albeit in a very specific way. Former Reagan administration economist Paul Craig Roberts has explained that capital gains tax cuts in the early 80s assured that industry could increase capacity to meet increased demand, instead of having to raise prices, which would add to the inflationary spiral. When combined with increased interest rates, which deflated the dollar supply, these tax cuts helped to kill stagflation in its tracks. In popular lore, however, as pushed relentlessly by the right-wing mythology machine, the true story was suppressed, and replaced by the fictional narrative that all tax cuts, especially for the rich, always stimulate the economy. After years and years of tax cuts for the rich with only recession to show for it today, however, we now know for sure that the conservative economic myth is, in fact, a myth.

Our economy is now facing the kinds of problems with which Keynes was all too familiar. Before the unique and situationally specific stagflation of the 70s, Keynesiansim was extraordinarily effective in creating and maintaining stable industrial economies. And a big part of that was, as our incoming President has described it, "spreading the wealth around." A dirty little secret of neoliberalism is that the rich aren't particularly effective spenders as far as macroeconomic stimulus is concerned: nothing can beat millions of consumers buying toothpaste, hamburgers, televisions, and refrigerators, certainly not the relatively few Mr. Howells and Monopoly Men out there buying yahts and palatial New England mansions.

Getting money into actual consumers' hands will rev up the economy in numerous ways that tax rebate checks and another round of handovers to the fabulously wealthy cannot. And it will also go a long way toward reversing the three decade long shift in economic fortunes toward the rich and away from everybody else. That is, it will make most American lives better.

It really is the right thing to do, both morally and economically.