More magic than a cape and red underpants needed to fix economy; but that’s all GOP offers


Despite the few details he leaked in the Denver debate — which contradict almost everything he and his campaign had said earlier, not to mention the GOP platform — Mitt Romney offers not much in the realm of a program to do better than President Obama in economics, in pulling the nation out of our economic doldrums.  Nobel-winning economist Paul Krugman explains:

Winner of the Nobel Memorial Prize in Economics, Paul Krugman - Tavis Smiley Productions image

Winner of the Nobel Memorial Prize in Economics, Paul Krugman – Tavis Smiley Productions image

As many people have noticed, Mr. Romney’s five-point “economic plan” is very nearly substance-free. It vaguely suggests that he will pursue the same goals Republicans always pursue — weaker environmental protection, lower taxes on the wealthy. But it offers neither specifics nor any indication why returning to George W. Bush’s policies would cure a slump that began on Mr. Bush’s watch.

In his Boca Raton meeting with donors, however, Mr. Romney revealed his real plan, which is to rely on magic. “My own view is,” he declared, “if we win on November 6, there will be a great deal of optimism about the future of this country. We’ll see capital come back, and we’ll see — without actually doing anything — we’ll actually get a boost in the economy.”

Are you feeling reassured?

In fairness to Mr. Romney, his assertion that electing him would spontaneously spark an economic boom is consistent with his party’s current economic dogma. Republican leaders have long insisted that the main thing holding the economy back is the “uncertainty” created by President Obama’s statements — roughly speaking, that businesspeople aren’t investing because Mr. Obama has hurt their feelings. If you believe that, it makes sense to argue that changing presidents would, all by itself, cause an economic revival.

There is, however, no evidence supporting this dogma. Our protracted economic weakness isn’t a mystery; it’s what normally happens after a major financial crisis. Furthermore, business investment has actually recovered fairly strongly since the official recession ended. What’s holding us back is mainly the continued weakness of housing combined with a vast overhang of household debt, the legacy of the Bush-era housing bubble.

By the way, in saying that our prolonged slump was predictable, I’m not saying that it was necessary. We could and should have greatly reduced the pain by combining aggressive fiscal and monetary policies with effective relief for highly indebted homeowners; the fact that we didn’t reflects a combination of timidity on the part of both the Obama administration and the Federal Reserve, and scorched-earth opposition on the part of the G.O.P.

But Mr. Romney, as I said, isn’t offering anything substantive to fight the slump, just a reprise of the usual slogans. And he has denounced the Fed’s belated effort to step up to the plate.

Read more at the New York Times.

Why do I disbelieve?

  1. For more than a year Romney’s been pushing tax cuts as a solution to everything.  It’s rather late to back out of that now.
  2. Tax cuts can’t stimulate the economy — we tried them for 8 solid years, and they crashed the economy.  One can make a great case that the Obama economy is not soaring because he agreed to extend the tax cuts, in return for getting about half of the stimulus we needed.  At some point, people hurting in this economy will realize that they can’t benefit from a tax cut if they aren’t paying huge taxes, and they aren’t paying huge taxes if they are unemployed.
  3. Tax cuts cannot be revenue neutral.  They hurt deficits.  For months Romney’s been talking about defense spending and tax cuts that add between $5 trillion to $7 trillion in to the deficit.  If he wishes to argue that deficits hurt, he’s in trouble.  If Obama argues that deficits should be used to help people, Romney will be unable to make the math work on his plan if he tries to reply.
  4. Economic theory isn’t with Romney.  Can he make that big of a snow job on voters?  Even if he does, the economy won’t take it.

Now’s a good time to beef up on the high school economics most of us took, or the college class we took.  Can you see any way to make an austere, Spain-style economy work in the U.S. without putting us into a death spiral?

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9 Responses to More magic than a cape and red underpants needed to fix economy; but that’s all GOP offers

  1. JamesK says:

    Then there is the fact that US companies are sitting on 2 trillion dollars and yeah…I haven’t seen a flood of hiring…

    So why don’t you be honest enough to admit that trickle down/supply side economics is an utter failure and farce, David. Because the only thing that it’s accomplished is to make the rich even richer while stagnanting and retarding the salaries of the middle class and the poor.

    Whereas if the wages of the poor and the middle class was actually growing at the rate it was between 1947-1979 before all this trickle down nonsense there’d be less of a need for government services, “entitlements” and welfare. But curiously that never occurs to the GOP….

    Which reminds me. Mitt Romney should get his dancing horse subsidized and Big Oil should keep their subsidies….but we should end the subsidy to PBS?

    Really? That’s the level of stupidity you guys have sunk to?

    Like

  2. JamesK says:

    To quote myself and just to add:

    After all..hiring employees lowers a company’s profits. So why would a company hire more workers if the demand for their products hasn’t gone up? Why would a company hire more workers if there is no need for additional workers?

    David, US companies are sitting on a collective 2 trillion dollars. And the Dow Jones is at its highest point ever. If them and the rich having more money means they’ll create jobs…then where are the jobs?

    If your supply side economics works shouldn’t those companies be creating a mass amount of jobs?

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  3. JamesK says:

    David, why don’t you expand your mind and watch this: http://www.youtube.com/watch?v=bBx2Y5HhplI

    It’s a speech that a “job creator” gave

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  4. [...] more time, again: Why “supply side” economics doesn’t work without demand I posted a short excerpt from a recent column by economist Paul Krugman, explaining why GOP reliance on magic to fix the economy probably won’t work.  Commenter [...]

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  5. JamesK says:

    David writes:
    But “demand is constituted by supply”.

    No..supply is driven by demand. Companies aren’t going to make products if no one has any money to buy any products. And companies aren’t going to hire more employees unless the demand for their products increases.

    After all..hiring employees lowers a company’s profits. So why would a company hire more workers if the demand for their products hasn’t gone up? Why would a company hire more workers if there is no need for additional workers?

    If supply side economics worked like you want to pretend, David, then W’s tax cuts to the “job creators” would have created enough jobs and economic prosperity that we’d be swimming in it.

    If you give all the money to the rich then exactly how are the middle class and the poor going to buy any company’s products?

    It is not trickle down that works, David, it is trickle up.

    Your position is in direct opposition to everything that has actually grown the economy in this country at any point in history.

    You can believe that right wing supply side economics from here until doomsday, David, and not only will you never be right you’re downright delusional.

    You are engaging in magical pixie dust thinking and we simply can’t afford right wing bulldrek any more.

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  6. Ed Darrell says:

    Krugman wants the government to spend as this will drive demand. But “demand is constituted by supply”. To buy something you must first produce and sell something. The selling is what gets you the money, but the production of value adding output is what first allows you to sell. Without value adding activity, there is nothing to sell and therefore there is no basis for demand.

    Well, there’s the problem. You don’t understand either the law of supply, nor the law of demand. You’re talking “supply side” economics, which we discovered didn’t work way back in 1982 through 1988.

    Supply does not stimulate demand, ceteris paribus. It’s the other way around. Henry Ford’s Model A didn’t created demand for transportation; the demand for transportation, coupled with a demand for transportation that didn’t involve horses and their natural effluents, created a demand for a horseless carriage. Ford created a machine that met that demand, and could manufacture it in enough quantity to matter.

    Demand is not “constituted from supply.” Demand comes from needs, and wants. If supply can be created to meet that demand, demand can be met from supply.

    But demand comes first, as Krugman, a Nobel-winning economist, well understands.

    If consumers have no money to buy, the quantity supplied cannot matter in the least. If there were no demand for transportation at all, Henry Ford is sunk.

    The law of supply explains how producers go about meeting demands — if prices are higher, they are happier to supply more. Again, if consumers have no money to purchase the good or service offered, the amount of supply is completely irrelevant.

    Before Henry Ford’s mass production of automobiles created a demand for gasoline, gasoline was cast off from oil refining as a waste product from the production of kerosene for lanterns. Refineries from Standard Oil dumped millions of gallons of gasoline into rivers — no demand, the massive supply simply did not matter.

    And as we can see from that example, demand not only creates the market, it can make a product considered to be waste, into the economic equivalent of gold.

    Without demand, supply is simply excess manure, or gasoline by-product from the production of kerosene, to be dumped into a river (and thereby pollute the hell out of the river).

    You’re right to say that without value-added activity, there is no economic activity. But tell that to Mitt Romney, who thinks finance is the magic, and not production.

    A key problem with all of Republican economics is the ignoring of consumers, and ignoring the reality that consumers need money to stimulate demand. Tax cuts can’t help the hungry, who cannot eat tax cuts, nor the unemployed, who cannot take to the bank tax cuts on non-existent income.

    Your odd myopia — maybe blindness — to the reality of how economics works, is shared by a lot of so-called conservatives. It’s a tragedy; it’s a tragedy I hope voters will put an end to, soon.

    Did you ever notice that no supply-side economist has ever won a Nobel? Have you noticed that few supply-side economics articles are available in journals? Has your search for the numbers to back up the Laffer curve been as unproductive as they have been for everyone else — including Arthur Laffer? (Laffer promised to publish an article explaining how supply side economics work, as soon as he got the numbers together. That was in 1982. 40 years later, there is still no real intellectual foundation for GOP claims of tax cuts creating wealth. Those studies that have been done suggest tax rates maximize revenue when taxes hit about 70%, more than three times the rates Laffer proposes. History shows a much different story than Laffer claimed: Tax cuts in the Harding and Coolidge administrations led to bubbles that collectively burst in October 1929, leading to the Great Depression; tax cuts in 2001 led to bubbles in housing and the stock market, which burst in 2008, leading to our Great Recession.)

    Right now, businesses are sitting on a pool of about $2 trillion, profits they’ve accumulated since 2008. If supply side economics worked, that money would be invested in manufacturing and service creation, and we should have an unemployment rate in negative numbers. The disproof of supply side economics is our current situation. Employers have plenty of supply of money, but they refuse to hire without demonstration of demand from consumers. Unemployed consumers, lacking money, cannot make that demand up from thin air. Magic does not work, in the real world of supply and demand, in economics.

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  7. Ed Darrell says:

    Happy to have you tackle the mathematical problems, David: With the $5 trillion in tax cuts, and $2 trillion in increased defense spending (on what, no one can tell — a new war?), Romney’s proposals put us $7 trillion deeper into deficits.

    While he insists that his proposals will not deepen the deficits, can you explain where that $7 trillion comes from? There is no “loophole” or deduction available to people with annual incomes over $1 million, which can make up even 14% of that total.

    Which deductions will be closed? Interest on mortgages? Deductions for children? Those are the only ones that offer the size of the income that needs to be made up — and only if those deductions are ended for the middle class, too.

    Romney didn’t qualify the deductions. He explained that he believes in tax magic. Pixie dust works in animated Disney cartoons, but Tinkerbell, and Jack of the magic beans in the child’s fairy tale, are wholly fictional. We can’t balance the budget on Big Bird’s nor Tinkerbell’s wings, nor on Jack’s magic bean vine to the clouds.

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  8. David xavier says:

    Romney is actually saying that business confidence will improve if he become president, and with this, investment will return i.e. “…We’ll see capital come back”. Why? Because Romney provides a certainty and continuity in that he will reduce barriers to business (i.e. taxation will be lower, regulations will be less…) Obama is proposing the opposite.

    Krugman mocks the notion of business / investor confidence by saying Obama hurt business peoples’ feelings, which is surprising since he is a noble prize winner, but there again so is Obama. Not its people not confident to invest their money under the Obama regime. The embarrassingly hyper partisan ideologically dogmatic Krugman also can’t believe the Zeitgeist cannot be changed with a change of Adminsitration …yes the Camelot of Kennedy didn’t happen; the optimism of Reagan period didn’t happen….Please. A change of president, who is exactly right on the economic theory, is what is needed to stop the double dip that will occur under Obama.

    Krugman wants the government to spend as this will drive demand. But “demand is constituted by supply”. To buy something you must first produce and sell something. The selling is what gets you the money, but the production of value adding output is what first allows you to sell. Without value adding activity, there is nothing to sell and therefore there is no basis for demand. Think of the new iphone as an example. Romney is dead right – investment is required, and this means capital and the right environment so that investors will have the confidence to invest! So when Obama chose trade unions over bondholders with Chrysler- he destroyed investor confidence. When Obama demands factory locations be changed so that trade unions can get access to the project, he destroys investor confidence. When he lets the EPA start hyper-regulating everything to do with energy production, investors lose confidence. When Obama says “ you didn’t build that” – you lose investor confidence. When Obama’s best buddy Corzine raids a hedge fund and walks free…investors lose confidence. Get the picture!

    So let’s look at your points:
    1. Romney hasn’t backed out of tax cuts he has qualified them. Certainly the maintaining of the Bush era tax cuts will promote investor confidence, through the continuity of the taxation regime and therefore promote economic activity. Obama wants to dismantle these tax cuts.
    2. Tax cuts didn’t crash the economy. What maintaining the Bush era tax cuts will do is increase investment, then jobs, and then increases in real wages. It is investment, of producing something, that stimulates the economy. Krugman argues that you could leave out the middle part of the process, that you could raise demand without having first produced something that added value. Just spend and the value adding production will follow. What we are finding at the moment, however, and in every country in the world, is that this is definitely not the case. There has been plenty of stimulus money spent, but almost none of it has been value adding. The results are massive deficits in every economy that attempted a serious stimulus but with no revenue streams to repay any of the debts incurred. The Government could try and pick winners….but as Romney nailed Obama in the debate….only losers have been picked.
    3. Tax cuts can be revenue neutral, if they are paired with the reduction in the size of the Government or savings. Ultimately lower taxes will cause the economy to rebound and increase revenue.
    4. Obama is simply out of his depth. The Fed have started QE3 to infinity and is debasing the US dollar and artificially lowering interest rates. Commodity prices are increasing as money is invested into commodities to beat the inflation and the shrinking value of the dollar. So it will get more expensive to live and jobs will still be scarce. Obama’s solution is to transfer money from the productive and give to the unproductive. Surely it would be better simply to get the unproductive a job? You have it back to front, the economy cannot survive Obama.

    Like

  9. JamesK says:

    but they have holy red underpants…..

    And in any other context a person claiming that their religion provides them with magic underpants would be taken away to Bellvue….

    Like

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