The Economist just discovered that the economic plan of the Republicans in office makes no sense. They simply cannot say that all of our economic problems stem from the budget deficit, then make the Keynesian claim that we need tax cuts to save the economy. It's either fix the deficit, or pass budget-busting tax cuts. In economics, you can't have it both ways.

Deficit hawkery as farce: Even more confusingly, 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?

Leave a Reply.