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Debating Economics

Wednesday, August 11, 2004
The economic debate has become very sterile over the last two decades. With the Keynesian consensus of the postwar era in collapse by 1980, the parties staked out very different visions. They have stuck to those visions every since, with only minor modifications.

Republicans argue that growth is best achieved by maximizing the rewards and minimizing the costs to entrepreneurs- eventually everyone will benefit. Oh, and deficits don't matter. Economic stimulus is best done, therefore, by cutting taxes on upper-income individuals.

Democrats counter-argue that instead we should maximize the purchasing power of middle and working class consumers in order to stimulate demand. This way there is someone to buy the products the entrepreneurs are selling, as well as guarantee a fair distribution of benefits. Large deficits are bad- if you reduce them, you can use low interest rates to stimulate the economy.

On the surface this dispute seems like a reasonable debate on how best to achieve growth. But the underlying assumptions of both are flawed, and the overall orientation is misdirected. Both sides have only a superficial emphasis on growth. In reality, what we have is a fight over distribution- who gets what share of the pie. Each party is championing the interests of its constituency at the expense of the other.

So what's the problem with that? Well, you can't cut up the pie if the pie is shrinking. Neither party's strategy for growth is adequate, because both Keynesianism and Neoclassical economics essentially assumes a closed economy. But as everyone knows, we now live in an increasingly globalized economy. So entrepreneurs, if they invest or create jobs, can do so overseas rather than in the U.S. And consumers aren't necessarily buying products made here. So the bang for the buck on fiscal stimulus is quite a bit less than it used to be. And monetary policy has reached its limits because we now have massive corporate and private indebteness (and a massive public debt to boot).

This stalemate has had grievous political consequences, both for the left and the country. The left has been caught in a bidding war with Republicans over who can cut taxes more- a debate we will never win. All we can do is whine "that's not fair!" Not that persuasive. Meanwhile, declining U.S. competitiveness and the erosion of the middle class continues unabated.

So how do we break out of this party and national dilemma? Well, I've been reading Michael Holt's book on the old Whig Party, and it struck me that the economic debates of the 19th century were only partly distributional. The Democrats were the anti-statist party: they wanted government to stay out of economic development (because they feared government action would be to the benefit of the wealthy), and the Whigs (most of whom later became Republicans) argued that national action could develop the nation's resources. They had a comprehensive plan (borrowed from Hamilton) to encourage growth. And guess who had the more compelling economic message? You might be surprised, but it was the WHIGS, not the Dem's. Anti-statism, when confronted with specific problems rather than abstract commitments, tends to be fairly unpopular.

So the Democrats should shift away from a debate strictly about distribution, and should focus on growth. We should articulate a vision of how liberal economic policies can benefit the middle class and the nation at large in the context of a global economy. As usual, Clinton pointed the way here, with his talk about human capital development and pro-labor, pro-environment trade policies. But we need to think harder about how to do so, and then how to pitch the idea to people.

If you provide a clear idea of how you intend to use government, then you can generate support for it. This will force the right to bash specific (and popular) programs, rathen than giving them the easy target of "big government." The Republicans took over the Whig's strategy in the 1860's, and it had not a little to do with their 70 year political majority.
Posted by Arbitrista @ 4:12 PM
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