Friday, January 11, 2008


Crackpots dancing

In the months leading up to the 1936 elections, Franklin Roosevelt and his Democratic allies in Congrss enacted new spending programs to create an artificial inflationary spurt in the economy. FDR was re-elected in a landslide; however, his left-wing economic plan pushed the U.S. into a painful recession in 1937-38. In his masterwork, The Roosevelt Myth, John T. Flynn dubs the machinations of Roosevelt and his cronies as "the dance of the crackpots."

We're now witnessing a new dance of the crackpots. The Democrats who're currently running for president have been offering increasingly silly and outdated proposals to stimulate economic growth. According to the Dems, we must - must! - do something to "stimulate demand." Their demand-stimulating ideas are basically warmed-over Keynesian claptrap that FDR's crackpots offered up sixty-five years ago. Unlike the present-day Keynesians in the Democrat Party, to borrow a line from Flynn, Roosevelt's crackpots had the excuse that most of their schemes had yet to be proven false.

Contrary to the crackpot theories of the neo-Keynesians, slow economic growth does not signify "too much supply and not enough demand." It signifies a mismatch between what companies are producing and what customers want. I'm sure there was excess supply in the candle industry when electric lighting became readily available. The answer to excess capacity in candle manufacturing was not for the government to stimulate demand for candles. It was to allow industry to make needed investments in the industries that were replacing wax and wick.

In times of slow economic growth, the government should focus its fiscal policy on removing barriers to investment. That's precisely what President Bush and the Republican Congress did in 2003 when they passed bold measures to reduce taxation. The Bush/GOP fiscal package to eliminate the double-taxation of corporate dividends and his slashing of marginal tax rates was a good start. However, accelerating depreciation schedules, lessening the tax burden on businesses, and slashing marginal tax rates again would help even more as the economy shows signs of significant slowing.

American consumers, who are becoming increasingly skittish due to high energy prices and the home mortgage mess, have been signaling for months that the current mix of investment is not generating what they want. Thus, financial and human capital must be redirected to new uses. This redirection will happen more rapidly if President Bush and Republicans ignore the new dance of the crackpots happening in the current Democratic presidential field and push hard for additional supply-side stimulus in the economy.

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