Wednesday, May 28, 2003

Paul Krugman's column on Saturday (it can be found here, at the Unofficial Krugman archive), has prompted a lot of debate and discussion, but one of the better discussions I've found is over at Bradford DeLong's message board, where the various aspects of (and solutions to) a liquidity trap have been analyzed and dissected.

What interests me the most about this situation is not that the Bush tax cut will be near-useless for pulling out of any such trap. That was obvious. It's that the apparent way out is for governments to somehow force up demand. Various solutions for this were proposed in the discussion, but some of the most interesting include environmental efficiency measures, connecting the "last mile to the home" with fibre optics, and various other regulatory boosts to demand, as corporations (and individuals) spend in order to get "up to spec".

(One person even suggested that maybe there should be a large-scale migration to HDTV- while interesting, it's not exactly justifiable in any way other than as a boost to consumption.)

This may put the United States in a unique situation. It means that the normal rules for "fiscal prudence" have been utterly reversed. The sort of affinity to governmental incentives and increased regulation that is usually painted as the reason why Democrats shouldn't be trusted with the economy is now precisely the thing that the economy may need. That doesn't mean the regulations and incentives should be pushed without thought as to their economic impact, but it does mean that when Mr. Bush is finally removed, the Democrat that replaces him will have a unique opportunity to employ spending to improve not only the economy, but everything else about the United States as well. Environmental spending, infrastructure spending, increased aid to the least fortunate, education spending... all the things that are normally cut to ribbons in the name of "responsibility" will be, instead, the salvation of the economy.

Come to think of it, this may be why the Republicans have been so vocal about tax cuts lately. After all, there are two ways to get out of a recession or slowdown- tax cuts and properly managed spending. The latter, however, is inimical to their entire worldview, as to forgo the idea of cuts as a solution to all problems would also bust the Republican coalition wide open. I imagine that the advice that the Bush administration and other Republicans have received is very similar to what I mentioned above, but any attempt to do it would not only ruin their rhetoric, but place them in a vice versa situation regarding Roosevelt's "false republicans and real Republicans", where the Democrats can easily reclaim their legitimacy and constituencies. Worse than that, it could possibly be the ruin of the Republican party- even without the breakdown of the coalition, the claim to greater financial responsibility that is the bedrock of Republican electability would be shown to be a lie. Supply-side economics would also be thoroughly discredited in the minds of the populace as well, as they get to discover that spending works just as well as the tax cuts. They'd be, in a word, screwed.

So, in essence, they have to do something, and if that something isn't tax cuts the Republican party will end up marginalized at best. They've made their bed, and have to lie in it. It's odd, actually, because most people (including myself) were under the impression that they deliberately chose tax cuts. I wonder whether that's true. I wonder whether or not the problem is that they're trapped, politically and economically.

It's unfortunate, though. They've stepped into the trap, but it's the American people that will feel its teeth.

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