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Follow the Money

The GOP risks misdiagnosing the weak economy.

Feb 21, 2011, Vol. 16, No. 22 • By JEFFREY BELL
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Freshman Wisconsin senator Ron Johnson, one of the most promising of the new wave of Tea Party-allied Republican legislators, was chosen to give the Republican radio address, delivered just after President Obama’s weekly radio offering, on Saturday, January 29. This was a notable assignment for a freshman because, for a party not occupying the White House, the weekly radio address (often billed as a “response”) is customarily seen as representing the views of the national opposition party as a whole.

Follow the Money

Here is the core of Johnson’s message: “For the last 31 years, I have been running a plastics manufacturing plant in Oshkosh, Wisconsin. As a manufacturer, I have learned to identify and attack the root cause of a problem, not spend my time addressing mere symptoms. Huge deficits, slow economic activity, high unemployment, and woefully inadequate job creation are severe symptoms of the problem. They are not the root cause. The ever-expanding size, scope, and cost of government is. This is what we must address. This is what I hope the president has come to realize.”

Johnson is to be commended for his focus on the need to separate symptoms from causes. Unfortunately, his analysis of the chain of causation is at best incomplete, and of a kind that (if widely replicated) is capable of setting Republicans on the path to a political train wreck as massive as the one engineered by President Obama and the late, unlamented Pelosi-Reid Congress.

Few conservatives would deny the role of bloated government as a drag on economic growth in the long term. But when it comes to the recent “severe symptoms”—“huge deficits, .  .  . high unemployment, and woefully inadequate job creation”—there is zero correlation between growth in government and the nosedive our economy entered in the fall of 2007.

Taking the five fiscal years prior to the 2007-09 recession—fiscal 2003 through 2007—federal spending as a percentage share of Gross Domestic Product was as follows: 19.7, 19.6, 19.9, 20.1, and 19.6. It’s not simply that the stability of these numbers belies the notion of a pre-recession trend. They all round to 20 percent, which is precisely the goal of several of the GOP’s statutory spending-limit proposals. 

A goal of 20 percent may look ambitious when contrasted with Obama-era (fiscal 2009 through 2011) GDP shares of 24.7, 25.4, and 25.1 percent. But offering a return to Bush-era GDP shares as a cure for the economic meltdown—a meltdown that began at precisely those spending levels during the Bush administration—doesn’t pass the laugh test.

Johnson is correct in seeing federal deficits more as a symptom than a cause of hard times. But many other Republicans speak of the size of the deficit as if this were a central part of what had halted the U.S. economy in its tracks. But in the four fiscal years prior to the recession, the federal deficit declined every year, shrinking from 3.5 percent to 1.2 percent as a share of GDP, a Bush-era decline of nearly two-thirds. These deficit declines would no doubt seem plausible to a liberal like Paul Krugman as a harbinger of economic collapse. They make a poor talking point for Republicans seeking a reduction in government.

Indeed, the true outrage of the Democratic ascendancy of 2009-10 is precisely Krugmania—the hyper-Keynesian belief that ever more federal spending is an answer to high unemployment or a collapse in private liquidity. The failure of Krugmania helped swell the Tea Party, as well as enhancing the Tea Party goal of a return to the more limited government envisioned by the Founders. In this sense it was a (rather costly) learning experience for American politics.

So should be the other half of Krugmania: the policy of zero interest rates and quantitative easing (QE2) by Ben Bernanke and his open market committee at the Federal Reserve. The former Princeton professor, obsessively campaigning to avoid the deflation of 80 years ago, is looking increasingly absurd at a time of sharp spikes in commodity prices. On February 1, Larry Kudlow of CNBC humorously (but defensibly) attributed the riots in Egypt to Bernanke-created inflation in the price of food.

The widespread willingness to exempt monetary policy from any blame even for inflation also retards serious debate about the proximate cause of the economic crisis that began in 2007: the popping of the worldwide financial bubble in U.S. residential real estate. This was the most recent of a long, disastrous series of bubbles, which are investment binges founded on debt-driven bull markets. And with zero interest rates topped off by Bernanke’s QE2, new bubbles are in the making even as we speak. Meanwhile the debt-driven, paper-money, fully gold-free system inaugurated by Richard Nixon in 1971, applauded by Keynesians like Krugman, is being given new opportunities for mischief every day it staggers forward without serious opposition.

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