Starve the Beast and Defeat Obama in 2012?

Do the Republicans believe in Keynesian economics?   As I read this piece , it crossed my mind that the Republicans may have read Keynes and now  seek sharp  budget cuts because they believe that this will reduce aggregate demand in the short run, raise unemployment and hurt Obama’s re-election prospects.    The budget cuts coalition may have other members who follow the Wall Street Journal’s “crowd out” logic that public sector deficits displace private sector investment.    While these two different groups have different economic models in their heads, they form a convenient coalition seeking smaller deficits now.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

32 thoughts on “Starve the Beast and Defeat Obama in 2012?”

  1. Unfortunately, Obama seems to have bought into this whole “deficit reduction now” idea.

  2. As long as we’re examining motivations, it’s hard not to suspect that some of the people trying to push the country into default have gold or other investments that might benefit.

    When one of two major parties is dominated by people whose motto is “Rule or Ruin,” we’re not practicing conventional politics anymore, and the usual journalistic assumption of moral equivalence between the parties is no longer justified. So far, the Republicans are mostly getting away with it, partly because the Obama “kill ’em with kindness” strategy doesn’t allow him to call his opponents out, and no other spokesman has emerged to fill the gap.

  3. Mark, have you read Krugman lately? His theory is that, while the Republicans’ plan to destroy the economy through austerity may be as cynical as you and plenty of others assert, he thinks that they might be employing a different sort of cynicism. That is, the lower inflation is, the worse employment and wages are, the happier creditors are because they can collect more real value on their customers (ie., working and middle-class Americans). So for the Republicans, it’s a perfect coalescence: they both improve their electoral chances (ostensibly) AND they are able to serve their most devoted constituency, the uber-wealthy who do nothing but skim off the rest of us.

  4. Gah, I meant to pose my question to Matthew, but it could be asked both of Prof. Kahn and Prof. Kleiman.

  5. Do Democrats really believe in Keynesian economics? It does, after all, conspicuously call for surpluses during good times, to pay off the debts incurred during the bad times, and when have Democrats made an effort to do that?

    No, neither party takes Keynesian economics seriously, for Democrats it’s just an excuse to run deficits, and never mentioned when it would advise the opposite.

    Republican efforts to reduce the deficits are not based in any way on Keynesian economics, but instead on the belief that, eventually, at SOME point, you’ve got to stop stimulating, or something breaks. That you can’t extend the mathematical models forever, because at some point people stop loaning you money, won’t take the money you print, hyperinflation sets in… And you will never know in time when this is going to happen.

  6. I’m just happy Matt is catching on. Now, sir, if you can just catch on about corporations blocking environmental progress, mitigation, and amelioration of our effects on the earth that would be great. Much in the way of markets speeding along with environmental solutions. And the time gap to fix the societal lag and the ecosystems’ need grows worse by the day.

  7. Yes, of course Republicans believe in Keynesianism – when it calls for tax cuts. For example in 2002 Republicans touted their tax cut stimulus. And they ran on that in 2004, having spared the country from a deep recession. Then they tried to make them permanent, because as Brett Bellmore pointed out “It does, after all, conspicuously call for surpluses during good times, to pay off the debts incurred during the bad times, and when have Republicans made an effort to do that?” (LOL trolls!).

    Republicans believe in Keynesian stimulus, but only in the form of tax cuts. But they don’t believe in Keynesian counter cyclical spending. Recessions are times to simulate through tax cuts, and booms are times to cut taxes to “give the taxpayers their money back” and to keep the good times rolling.

  8. Brett: “when have Democrats made an effort to do that?”

    The Clinton presidency is famous for its surplus at the end of his second term.

    And Obama’s ACA is very much an attempt to lower Medicare and healthcare spending, which will make it easier to pay down the debt.

    So the answer to your question is … Democrats do it most of the time.

  9. Sean, the theft of other people’s labor being the primary livelihood of that class, it certainly makes sense as you point out that they’d like to worsen unemployment and wages.

  10. Brett Bellmore wrote, “Republican efforts to reduce the deficits…”

    LOL. What efforts would those be?

  11. The Clinton administration is famous for a stock market bubble inflating revenue faster than spending could keep up, coupled with open warfare between the Executive and Legislative branches. And even so, there was no surplus… though we did get close to balance, before the bubble burst.

    For most of my adult life the Democratic party controlled Congress, and the budget wasn’t balanced, let alone in surplus, year in, year out. Near balance for a couple years during one President’s administration is a pretty weak response to that observation.

  12. @brett–i’m glad to see you haven’t lost your mojo. this is the funniest stuff you’ve written in weeks. there was a stretch there where you were unfunny and, even worse, boring.

  13. liberal,

    To be fair, George H. W. Bush worked with the Democratically controlled Congress to reduce the deficit. Back then it was important to Republicans. Then in 1995 they threw it all away and worked to thwart the budgets of Clinton with big tax cuts. Once the Republicans controlled both Congress and the Presidency for the first time since 1930 and the Hoover administration, they cut taxes, raised spending, and blew the budget to bits. And trolls like Brett will still say they are the more fiscally responsible party. I think that is really good marketing by Republicans right there. That or really good trolling by Brett!

  14. That or really good trolling by Brett!

    Speaking of marketing, AIUI that phrase was just entered in the Marketing Phrase People annual “least likely to be plausible in a marketing campaign” contest for 2011. Well done, sir. Well. Done.

  15. Brett, you may have forgotten that GWB won (or at least got close enough to steal) the 2000 election on the claim that the Clinton-Gore surplus meant that the taxpayers were being “overcharged,” and the demand that it be dissipated with what became the 2001 tax cut. Gore, if you recall, wanted to put the Social Security surplus into a “lockbox” so that it would have to be used to pay down the debt in preparation for the Boomers’ retirement. But the rest of us haven’t. Please try to stay reality-based while you’re visiting there. Thank you.

  16. The present situation seems to have so many parallels to the 1828 Presidential election. We can only be thankful that the Republicans don’t have anyone remotely resembling Andrew Jackson.

  17. You seem to confuse me with somebody who actually likes the Bushes, whereas I’m merely somebody who thinks Gore’s lockbox was a bit of a sham.

  18. To be fair, George H. W. Bush worked with the Democratically controlled Congress to reduce the deficit. Back then it was important to Republicans.

    Even in his time, GHWB wasn’t representative of the Republican rank-and-file, specifically because of his interest in keeping the deficit manageable. GHWB’s approach was a sharp break from the deficit explosion favored by his predecessor, and later, by his son. He is reviled among Republicans for this.

  19. Personally, I revile him for telling the BATF to “sic ’em”, leading directly to Ruby Ridge and Waco. But why quibble? There’s no shortage of things to revile either Bush for.

  20. Wouldn’t it be cool if RBC Holy Fool Bellmore fessed up and said which politician he could support for President? I mean otherwise he’s akin to a hagfish. All slippery, constantly shape shifting, and steadily producing copious amounts of slime.

    (Yes yes Brett we know you’re just an art project.)

  21. There is some truth to Brett’s charge that the Dems aren’t particularly serious about Keynesian economics during expansions. I agree with those who have pointed out that the Dems aren’t as bad as the GOP, but they’re not really any good during booms wrt counter-cyclical spending. That’s when government should shrink and save up for the next recession. But that just about never happens. And when it has happened (sort of), it tends to be the result of the GOP’s (dogmatic, constant) demand for spending cuts.

    If the Dems had been true to Keynesian counter-cyclical spending, they might have the decisive upper hand when it comes to claims of fiscal responsibility. Or at least so I fantasize. In reality, the noise machine would still paint them as wastrels and Norquistians as paragons of fiscal virtue.

  22. Thank you Rob for at least getting it mostly right, in contrast to Benny’s apparent sieve of a memory. The Clinton surpluses were the direct result of having a Republican Congress after 1994 which forced him to accept welfare reform and other budget balancing moves. Clinton’s only contribution was his determination to starve defense.

    If you guys could somehow rise above your paranoia, you might understand that the R’s current budget obsession is sincere, as opposed to when they lost their way during the Bush years as power led to earmarks and other wasteful procedures. Congress (meaning both parties) were profligate, and GWB’s failure was in not imposing any roadblocks in the form of vetoes. For this he was rightly taken to task by the WSJ editorial board and other true conservatives. However, the excess spending was mostly not his idea.

    There is an issue that budget discipline now goes against Keynesian principles, but that is a problem for you only if you still believe that he hasn’t been pretty much discredited. The D’s and the Fed have been trumpeting deficit spending in the form of stimulus, QE1 (monetizing stimulus) and QE 2 for two years but to no apparent avail. Now we’re out of stimulus bullets and heading back to the precipace. Naturally R’s want to give supply siders their turn.

  23. I think that description puts Republicans in entirely too positive a light.

    First, there were no ‘Clinton surpluses’; The national debt went up every year of the Clinton administration, and that doesn’t happen if you’re actually running surpluses. But that’s phony government accounting for you, designed to disguise how bad the deficits really are. That said, the deficits were quite small for a little while there.

    BUT, these low deficits came at a time when profit taking at the peak of a stock market bubble was artifically inflating revenues. They owe at least as much to that unusual surge in revenue as they do to any fiscal discipline, and the bubble popping had as much to do with their end as the change of administrations.

    And I will grant Clinton a share of whatever discipline there was, although I’d contend it wasn’t so much discipline, as a Legislature and Executive too much at each others’ throats to agree on how to spend the booty.

    Further, Congressional Republican discipline, such as it was, pretty much collapsed within a few years after the ’94 election, as the GOP establishment beat back insurgent freshmen, and settled down to an orgy of rent seeking that continued through the Bush years. The Tea party’s hostility to Republican incumbents is due in large measure to that disgusting record.

    Finally, it’s very much in doubt at this point whether the GOP establishment is serious about fiscal discipline this time around, rather than just putting on a show in an effort to stave off Tea party primary challenges to legislative leaders.

  24. “The Clinton surpluses were the direct result of having a Republican Congress after 1994 which forced him to accept welfare reform and other budget balancing moves. Clinton’s only contribution was his determination to starve defense.”

    I love the emotional arguments here. Which saved more money, welfare reform or reducing defense spending during peacetime? The Republican brand is strong, as Redwave kindly demonstrates.

    “you might understand that the R’s current budget obsession is sincere, as opposed to when they lost their way during the Bush years as power led to earmarks and other wasteful procedures.”

    We believe it is sincere in it’s desire to cut taxes, cut spending for demographics that tend to vote Democratic, and fail to balance the budget. I’m curious why you believe in this new found “sincerity”.

    “Now we’re out of stimulus bullets and heading back to the precipace.”

    We certainly are not out of stimulus bullets. Again, this is an emotional argument not an empirical one. You also misspelled precipice.

    “Naturally R’s want to give supply siders their turn.”

    Isn’t that just stimulus with another name? Cut taxes, raise spending…they both result in deficits. Again, this is a clear example of branding causing people to form emotional attachments to the parties and make emotional arguments devoid of any substance or facts. I thank you and Brett for taking the time to display such emotional attachment to the Republican party. It clearly demonstrates the arguments I made earlier.

  25. (Yes yes Brett we know you’re just an art project.)

    Word. And that’s my line, but I use “performance”.

  26. Redwave72 says:
    June 10, 2011 at 2:20 pm

    “Thank you Rob for at least getting it mostly right, in contrast to Benny’s apparent sieve of a memory. The Clinton surpluses were the direct result of having a Republican Congress after 1994 which forced him to accept welfare reform and other budget balancing moves. Clinton’s only contribution was his determination to starve defense.”

    This is a lie. Check out any chart of the deficit over time, since 1980, and you’ll see that there were inflections points in 1990 and 1993/4, before the GOP took Congress. There was no inflection point in the few years afterwards. IOW, Bush I and Clinton made the changes, and the GOP Congress had no visible effect.

  27. Brett: “Keynesian economics? It does, after all, conspicuously call for surpluses during good times, to pay off the debts incurred during the bad times, and when have Democrats made an effort to do that?”

    Well, no, Keynesian economics does not call for balance over the business cycle. If an economist tells you that, he’s being an idiot. That would imply, on average, no Federal debt at all, and that would be an economic catastrophe.

    One would expect “during good times” (a GDP growing at a goodly pace) that the ratio of Federal debt to GDP would decline. But, even during such good times, the Federal government might be running a modest primary deficit, and the absolute amount of Federal debt could be increasing. Given trend growth, running a primary surplus would be a relatively rare event, appropriate as a matter of policy only to restrain a period of runaway boom.

    Properly managed by a central bank, the national debt is an economic utility, a kind of institutional public good, supplying a benchmark, “risk-free” marketable security, and allowing for stable expectations regarding the value of currency thru time. This enables all kinds of complex financial deals, supporting (we hope) the exploitation of opportunities to invest “real” resources, which may yield superior returns, compared to the risk-free return promised on gov’t debt.

    If the central bank knows its business, it keeps financial frauds down to a dull roar, inflation at a low, but positive and stable rate, and the base rate of interest (the rate of interest paid by the government on its debt) below the rate of economic growth. And, if the national government is passably competent, it collects taxes on economic rents, sufficient to reliably fund the national debt, while efficiently providing public goods and services, investment in public goods with a posititve net present value, police and other regulation of markets and contracts, and cheap insurance.

    As for the historical record, the ratio of national debt to GDP declined during the terms of every Democratic President since World War II, except Obama, and has increased under every Republican President since Ford. Primary budget surpluses have happened only twice — under Johnson and Clinton.

  28. I’m not sure how “starve the beast” theory gets any traction – whatever the GOP was trying to do with revenue, it went up, even after adjusting for inflation and population growth. You really can’t go one or two years at a time, because business / interest-rate cycles (read “bubbles”) skew the results. If you take the average annual per capita revenue, in constant dollars, for each decade since the 1950s, the trend is steadily UPWARD.

    As for Keynes, policy-makers have traditionally followed only his “stimulus” advice and never followed the “pay it back during good times” side of the coin. Even so, the “stimulus” side of the coin is also misguided – printing and spending money for its own sake ends up with inflation. And Krugman is the one being cynical here, seeing no inflation “except for food and fuel prices” – what does he think people buy? Inflation measured the way it was measured in the 1970s is close to double digits – and inflation reduces the real wages of the 90% of us who still have jobs.

    As for policies supposedly benefiting the “rentiers” at everyone else’s expense – leaving aside the fact that printing two trillion dollars isn’t likely to solve a problem that resulted form printing one trillion dollars, I’m not sure how that plus 0% interest rates indefinitely aren’t enough.

    As for tax cutters being mega-Keynesians, I think someone fails to understand the “supply” part of “supply side.” Tax cuts are, by definition, targeted – at those firms and individuals who are generating taxable income, which means they’re producing goods and/or services that consumers are purchasing (or successfully investing in firms that are). The more profitable the firm or individual, the bigger the tax savings, thus the more likely that the initial tax savings will be reinvested in production. By definition then, the jobs that are created are jobs producing something for which there is a market. It doesn’t take a genius to figure out why this is better than a government-spending-fueled temporary increase in construction jobs, or a hack job, or one of FDR’s made-up jobs chasing tumbleweeds.

    We had a bubble. Anyone who has access to the internet can go to http://www.mises.org and learn about how this bubble and all prior bubbles were formed and how they popped. Bubbles artificially pull demand forward – just like government incentives to buy heavy equipment or automobiles. And they cause a run-up in debt. The government is now making it as easy as possible for consumers and businesses to do what they need to do – deleverage. Attempts to revamp demand miss the point – the apparent demand 6-8 years ago was not real and is not the “normal level” to which we need to return. We pulled demand forward a few years and now we need to pay the bill. Once that’s done, and only when that’s done, demand will return.

    If you apply Gaia theory to the economy, what we did after 9/11 was drink 3-4 pots of coffee and pull a few all-nighters. Sorry but we need to sleep it off.

  29. The single way to stop the destruction of America is to run 32,000 candidates in the 2012 election… which means, we field 2 people – 1 as a candidate in each major party primary, running for every office, County, State, and Federal, on a government by Law Platform. The government by law campaign points are :

    1. capture and deport all illegal alien criminals and charge the whole cost of each illegal alien occurrence to each illegal alien; and then, against the country of origin, charge a value equal to the whole illegal alien criminal costs against the nations from which the invading illegal alien criminals came;

    2. arrest and prosecute all government employees who use their office/position/public/private funds/employees in any manner that aids and abets illegal aliens; [here judges get rolled, cuffed, and stuffed by the court bailiff as per RICO.]

    3. arrest and prosecute all corporate/association/organization principles who use their office position – private public -funds – employees in any manner that aids and abets illegal aliens; [here, all foreigners aiding and abetting illegal alien criminals roll in as per RICO]

    4. arrest and prosecute all Media corporate/association/organization principles, talking heads, and principle owners/manipulators who use their media/access/control/position to aid and/or abet illegal alien criminals;

    5. arrest and prosecute all Attorney [corporate/association/organization] principles and principle owners – manipulators who use their commercial/public employee legal position to aid and/or abet illegal aliens;

    The opening 5 point campaign message from each candidate is timely and simple, each candidate says

    “I will secure the deportations of all illegal aliens, and the criminal and civil prosecution of every government employee who aids and abets illegal alien criminal activities – operations.”
    “Elect me now ! Elect me, I will use the office to compel the uniform operation and application of Law“;
    “I will uniformly enforce America’s unique practice of one common law – commonly applicable to all.”

    “When you vote honest people like me into office, replacing the current, criminal, government employees, there will then be no protection for the ousted incumbents… thus, the full weight of criminal prosecution and civil suit will operate against the evicted government employee criminals for each crime involved in being the agent of and/or otherwise aiding and abetting illegal alien criminals : illegal alien criminal enterprises.”

    Think about it, 32,000 candidates in the field during the primary election = 16,000 D candidates and 16,000 R candidates on TV and at every meeting, campaigning for Every public office, running on the issue of securing government by Law [see 1 thru 5 above] …a government that is : Free from the whims of the political charlatans who now occupy, obstruct, and/or refuse to carry out the operation of the Law; Free from the government employees who violate the public trust, loot the tax payers and country, aid/abet illegal alien criminal activities.

    If nothing else, the plan to use both parties to field and fund 32,000 primary candidates, all running for office on the government by law platform, should be discussed by the general political Voters. So, you have a duty to move the idea of instituting government by law to be the mainstream electoral discussion – with a healthy dose injected into all of the colleges and universities [in every case work in Austrian economics].

    The disgruntled voters : retired, set for life, young, old, middle class can easily locate one another, hire someone like me to tell them where to find the information they will need to straighten this mess out; then, those voters will organize, put in motion, and operate political solutions for America that do not involve bankrupting our country OR using public offices/funds to aid and abet illegal alien criminals : criminal enterprises.

    Thanks, Mark, 1meamark@gmail.com

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