[PEN-L:32596] dems & deficits

["Devine, James" <jdevine@xxxxxxx>]

Title: dems & deficits

[was: RE: [PEN-L:32593] am i wrong in recalling conservative mantra from past aboutgov't deficits causing (or resulting in)]

you aren't wrong in your memory. However, that torch has been taken up the the Democrats. Some bright person thought that it would be cool to embarrass the GOPsters by pointing out the contradiction of the Reagan Republicans running big deficits when they were supposed to be fiscally conservative. Then this fiscal conservatism became the Democratic Party Line (partly due to the influence of the DLC but mostly under the influence of big donors), so that the DP went whole hog, rejecting their Keynesian heritage (which must not have had deep roots). The GOPsters of course simply pushed their supply-side economics further and deeper (while keeping the Lafferite stuff about tax cuts for the rich paying for themselves under cover) while revelling in the fact that Reagan/Bush/Bush deficits meant that the civilian spending favored by the Dems would have to be cut unless (1) the Dems endorsed higher taxes; (2) the Dems decided that it was okay to cut the military; or (3) the Dems embraced deficits. While all three of these have occurred on occasion, it doesn't seem like the Party Line has been bent. In recent years, the Dems have switched over to endorsing big military budgets, so they're f*cked.

The theory is that government deficits --> high demand for funds --> high real interest rates --> low private real investment (what's called "crowding out") --> long-term depression of supply-side growth.

Government deficits can lead to high rates if the economy is operating at close to capacity. Otherwise deficits can lead to higher income, which lead to higher saving, which dampens the upward movement of rates.

High rates can hurt private real investment, but only if the "crowding in" effect isn't present. The latter refers to government deficits allowing the realization of profits, _stimulating_ private investment. (This is also called the accelerator effect.) Back in the 1960s, when government deficits started rising due to the Vietnam war, private investment did pretty well.

Low private investment only hurts supply-side growth if it's not replaced by government investment in education, research, infrastructure, public health, etc. The Reagan/Bush/Bush tradition keeps reducing government investment, so that the last link in the crowding out chain is partly a result of their policy.

------------------------
Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine

> -----Original Message-----
> From: Michael Hoover [mailto:HooverM@xxxxxxxxxx]
> Sent: Wednesday, November 27, 2002 7:44 AM
> To: pen-l@xxxxxxxxxxxxxxxxxxx
> Subject: [PEN-L:32593] am i wrong in recalling conservative
> mantra from
> past aboutgov't deficits causing (or resulting in)
>
>
> am i wrong in recalling conservative mantra from past about
> gov't deficits causing (or resulting in) high interest rates
> because feds
> crowd out private sector (or something like that), white house
> people are saying there is no relation between deficit size
> and interest rates and are pooh-poohing 'fiscally responsible' dem
> criticisms...   michael hoover
>
>