Voodoo Economics

During the week just passed, Republicans in the Senate tried and failed to sink the Affordable Healthcare Act. Over in the House, Paul Ryan -- the Chairman of the House Budget Committee -- proposed cutting $58 billion from President Obama's 2011 budget. "Washington's spending spree is over," he announced. "We must chart a new course."

Ryan's plan drew the following comment from The Economist -- a magazine not noted for its leftish flights of fancy:

there is no plausible argument that current unemployment or slow growth stem from the federal budget deficit. The mechanism through which budget deficits can lead to unemployment and slow growth is the bond market: government borrowing raises interest rates, which makes credit more expensive for businesses. But the 5-year treasury bond is under 2%, and the most recent auction had a bid cover of almost 3 times. Unsurprisingly, with interest rates low, the cost of credit ranks low on the list of businesses' chief concerns. Those who acknowledge that deficits don't seem to be driving up the cost of credit, but still want to blame deficits for the poor economy, have pointed to business uncertainty over potential future tax increases to cover government debt. But how does enacting an $800 billion two-year tax cut and then cutting $50 billion or even $100 billion in spending assuage business uncertainty about future debt? In any case, the main reason businesses are not expanding is that they are worried about lack of demand from consumers and other businesses, who are still deleveraging from the debts they built up during the 2000s and the collapse in their asset values during the financial crisis.

Some were relieved that Ryan recommended making only half the cuts which Republicans campaigned on during the last election. But, even so, Ryan's proposal sounded eerily like Andrew Mellon's advice to Herbert Hoover: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate."

Despite Republican claims that business is uncertain about their future tax burden, the real reason they are sitting on all that cash is lack of demand. Why start up production if you fear there will be no customers?

Mark Twain wrote, "History doesn't repeat itself -- at best it sometimes rhymes." Huck Finn said it even better: "I been there before."

This entry is cross posted at The Moderate Voice.