Sunday, February 22, 2009

Senator McConnell: For Short-term Fiscal Restraint But Against Long-Term Fiscal Restraint

Advocates of long-term fiscal restraint often argue ala the Solow growth model that increases in national savings lead to more investment as long as we can assume full employment is maintained. During periods of weak aggregate demand (such as the current one), a strong case for short-term fiscal expansion can be made. The Obama stimulus bill was designed to reverse the slide in aggregate demand. However, Senator McConnell and other Washingtonian Republicans – aka the neo-Hooverites - opposed this fiscal stimulus on the grounds that it sacrificed fiscal responsibility.

President Obama has trumped these fools by arguing for long-term fiscal responsibility. John King asked Senator McConnell about the President’s proposal to reduce the government deficit over the long-run in part by letting the Bush tax cuts for the very rich sunset:

So we have got to ask ourselves whether increasing capital gains taxes, dividend taxes and taxes on small businesses is a great thing to do in the middle of a deep recession.

Excuse me but recessions do not last forever and the President was clear that he has been talking about a mix of short-term fiscal stimulus and long-term restraint. Is McConnell really this stupid? I doubt it as his hypocrisy has been standard Republican practice for over a generation. They justified the 1981 tax cut on the grounds that we had a recession to deal with – never mind the fact that fiscal policy was operating at cross purposes with Volcker’s monetary policy. We would have had more national savings had we had less fiscal stimulus and a quicker path to lower interest rates. Bush43’s tax cuts may have been sold as dealing with the 2001 recession but the truth was they were not as much about immediate fiscal stimulus and more backloaded in their impact on aggregate demand. We continued to hear GOP calls for making the tax cuts permanent even as the economy rebounded and the Federal Reserve chose to raise interest rates.

For McConnell to use the recession as an excuse not to eventually raise taxes is pure hypocrisy. But it is also standard Republican rhetoric – as stupid as this rhetoric may be.


YouNotSneaky! said...

"Advocates of long-term fiscal restraint often argue ala the Solow growth model that increases in national savings lead to more investment as long as we can assume full employment is maintained."

Show me a long term model that doesn't assume that higher savings eventually translate into higher investment. Solow's got nothing to do with this (and including it weakens your case - I think).

I agree with the rest.

Maurice said...

Mark Sanford
I am from South Carolina,
I see people every day losing there jobs,people that used have great jobs ,but now are fighting to find a job,I hate saying this but Mark Sanford must not be thinking about the PEOPLE who put him there.
I am sure what or President decides is best for all of us,Or this about Mark Sanford.
Trutful i think he should be impeached.
He is not thinking about the people who put him there.
Maurice Varner

Jack said...

"...the Solow growth model.." blahda, blahda...etc.

Given that economic models are built up through a descriptive process of past events, note descriptive not exlpanatory, what value have they in the process of predicting future events? Given the multivariate nature of economic events; given that any ten ecnomists seem to adhere to three, four or more predictive models, why do economists continuously use such jargon? Who's trying to fool whom?