McCain's Plan: Not Just Worse than Alternatives, But the Dumbest Idea Since Putin Reared His Head

The lynchpin of John McCain's born-again fighting spirit to rescue the economy is to slash the federal budget, crucify the big-spenders and to sprinkle taxcuts to the wealthy and to businesses. Everything else he has mentioned -- from the strong fundamentals of the economy, to his plaintive call for a commission, to his opposition then backing of the AIG takeover, to suspending his campaign to deal with the crisis, and on and on -- is so obviously contrived that it is clear even to non-policy wonks that McCain does not have the foggiest idea of what he is talking about.

I'll give him this -- cutting spending is about the only proposal he has made in this campaign that sounds remotely authentic, and on that basis he may regain a bit of traction.

Authentic, but incredibly dumb. So dumb that it must have arisen from his insistence, not from an economic team that had even a semblance of skill, as his does. Thus, it is also an insight beyond the Palin pick into the impulsive stupidity a McCain presidency would be -- and, of course, we have not experienced the results of such a governing style.

Do not, do not, confuse cutting spending with ridding the budget of "waste-fraud-and-abuse". One gets the impression that McCain conflates eliminating wasteful spending with cutting overall spending levels. Again, dumb. Even if we succeeded in that endeavor, overall federal spending in this type of economic downturn must go up, dramatically. Eliminating waste-fraud-abuse, with which no one would disagree, would enable that money to be spent productively.

But spend it we must. And massively. A little history and a little logic will show why.

And, it will be immediately obvious why the lynchpin of McCain's grand plan is not just worse than alternatives, it is absolutely contraindicated for our economic health.

Prior to the Great Depression, the conventional wisdom among economists was that private spending and government spending were nearly a zero-sum undertaking. Reduce government spending, and private spending will increase; and conversely. Thus, aggregate demand would be largely unaffected, and the presumption in favor of the private sector prevailed. [There is some slight difference because 100% of government revenues would be spent, whereas individuals might save a portion, but that is more complicated than necessary for this story].

John Maynard Keynes was the economist of the Great Depression. He noted that in extreme circumstances, as we faced then and do now, the contraction of private spending would not be "cured" by reducing government spending. Rather, reducing government spending would reduce total demand (government + private) leading to a deflationary spiral that would result in further contraction of private spending. Hence, it was critical in such circumstances to pump up demand by dramatically increasing public spending until some time after robust private spending recovered.

The record of the '30s bore that out. Roosevelt believed (note the word: "belief") strongly in balanced budgets, but deficit spent in his first term, and the economy began to recover. Noting the positive trajectory, Roosevelt returned to his budget-balancing beliefs and cut spending in 1937. The economy nosedived again. As the need to prepare for and then fight the Second World War impinged upon conventional wisdom, Roosevelt increased spending again, and the economy recovered.

Politically, Roosevelt's about face in 1937 had lingering effects. Republicans spent decades proclaiming the New Deal an economic failure, and railing against government spending, especially deficits. (That is when Republicans were still Republicans). The Great Depression generation, and their children, had too many experiences of being saved by FDR from starvation (my ancestors included) to be persuaded by the claptrap.

And, of course, the Republicans hated Roosevelt ("a traitor to his class", how's that for class-warfare?!) even more than they hated his policies so they committed the classic error of their arguments proving too much. The New Deal itself, with the volte face of 1937, did not, until the end of the decade, show huge improvements in economic activity.

But, New Deal policies did work, if only FDR had followed through, and they would have worked better if they had been even more massive in size. The economic data support that conclusion and the theory that accounts for it.

For private spending to grow, businesses must believe there will be a market for their products. Otherwise, they do not hire people, they do not invest in new plant and equipment. For consumers to spend, a few factors are necessary: there needs to be some security about the job, the psychology of enjoying the fruits of one's labor and/or investing for one's children's future must dominate, and, increasingly, the risk of everything disappearing overnight must be substantially reduced.

It will take some time, and some policy changes to re-instill reasonable consumer confidence. Universal healthcare will eliminate the risk of losing everything because of illness or job loss. A total revamping of our energy infrastructure to rely upon renewable, home-created, and stably priced energy will improve security, and increase the cost of moving jobs overseas. Changes in tax policy to account for the global economy and the economic slowdown will improve confidence. [Subject of another article].

In the meantime only massive public investment can fill the void, maintain and increase aggregate demand, keep people at work and, if correctly spent, provide competitive advantages for the future that the economy can capitalize upon. For example, suppose we retrofit all our buildings to save energy. A one-time cost to retrofit. Tens of thousands of high-wage jobs in the meantime. A lifetime of savings and improved efficiency. Same with upgrading the electric grid, building highspeed rail between cities and underground light rail within them.

McCain is, and will be saying until the end of this campaign, that increasing taxes on the wealthy will destroy jobs. The evidence from the '93 budget resolution, in the midst of a recession, and the 23M jobs created in the ensuing 8 years, indicates otherwise. Moreover, since these tax dollars will be spent under a massive public works plan, the net impact on the economy will be positive.

John McCain's plan for rescuing the economy could hardly be dumber.

That Putin is out there, rearing his head, is no excuse. He's got Sarah Palin to take care of that.

Comments

[JPHR]

Mr. Paul Abrams,
Using Putin's name this way only clarifies that you have fallen on the Bush Neocon propaganda with respect for Russia. Putin in a security conference end 2007 only complained about the US arrogance and neglect for international law and institutions. After Iraq Putin had point. In frank language Putin exposed the NEOCON wet-dream of unipolar world within which the US could roam at will. That made Putin a target for the Neocon in line with Bush' spoiled brat doctrine: "Either you are with or you are against US".

By the way Putin is now following an anti cyclical policy along the lines you are proposing.

However Japan tried to spend itself out of the last real estate depression without much success.

[Paul Abrams - Huffpost Blogger]

I used Putin's name that way as a means of referring to Sarah Palin, and comparing McCain's cut-spending mantra with his decision to pick Palin as his running mate, and potentially put her a heartbeat, or brain metastasis, away from the Presidency. It had no deeper meaning than that.

[XME]

Seems no one's told McCain that the WORST thing you can do during a recession is put a government spending freeze in place. That just results in more lost jobs, etc. All those programs and departments he wants to cut are run by JOBS!

[Greygolla]

They say we are in danger of a recession. OK. The cure for that is inflation. That is why Bush passed out our economic stimulus money and why we are going to print up a pile more. If you want to see me spending, give me some bucks that are only going to be worth half as much tomorrow. McCain recalled the depression when the banks called in the loans, folks could not pay, and were evicted. The banks that did not fail had to hold the mortgages long enough that they were worth money again. What a toll of misery caused by borrowing from the future. Willing workers and no wages. The rich got richer.

[USA1776]

Did Sarah Palin just quote Westbrook Pegler again without attribution.

[Levittown]

Sarah Palin has become as irrelevant as the man she admires, Dick Cheney. As for Mccain and cutting government spending he means it. He has tried to eliminate almost all funds for arming our militery, benefits for veterans families and educational benefits for returning vets, He has voted no on 8 0r 9 bills for the solders in and out of service. He voted against aid to childrens health care. He has a narrow view of the welfare of the needy and wide acceptance of the wealth of the very rich. His resume as a Senator is very suspect, especially his lobbyist connections and the Indian casinos. His gambling in these casinos is not very Senatorial.