Roll Call: Latest News on Capitol Hill, Congress, Politics and Elections
October 25, 2014

Neither Supply-Siders Nor Keynesians Have the Answer for This Economic Crisis

Give President Barack Obama credit for at least trying to diagnose and grapple with the economic crises of our era — slow growth, widening income inequality and diminished upward mobility.

The deeper dilemma for him and the country is that his proposed solutions — largely, government stimuli of various sorts — aren’t working and might be inadequate to counter the huge forces at play: globalization, technological change and deterioration of social capital.

As Republicans and conservative economists delight in pointing out, economic growth under Obama — averaging 2 percent a year — is the weakest for any recovery since World War II and is slowing, not accelerating.

Official unemployment is 7.6 percent, but it’s nearly double that when the under-employed and those who’ve given up looking for work are counted in. The percentage of adults either working or looking for work actually is dropping.

And despite Obama’s efforts to redistribute the wealth through tax policy and enhanced benefits, median household income has actually fallen 5 percent since recovery began in June 2009.

While the Federal Reserve’s keeping interest rates at almost zero has produced a boom in the stock market, it’s benefited primarily the wealthy and big banks, but not small business, where most new jobs are created.

Meantime, while Republicans bash and try to thwart Obama, their own proposals — always involving less government — are just as inadequate.

Lower taxes and weak regulation didn’t produce significant job growth under President George W. Bush. Adding fiscal and monetary austerity to the mix surely will widen income disparities.

Republicans may be right to charge that Obamacare is discouraging employers from adding full-time employees.

They may be right to say that the Environmental Protection Agency regulation is blocking full exploitation of the promise of cheap energy — especially natural gas.

But slashing investment in education and infrastructure — as congressional Republicans are determined to do — won’t help rebuild the social and physical capital the country will need in order to prosper.

The fundamental truth might be that the economic experts who advise both parties are in intellectual crisis, bereft of ideas to lead the nation out of trouble.

It’s happened before, but usually only to one economic school at a time. “Classical” economics, inspired by Adam Smith, ruled U.S. policy in the 1920s. Taxes were cut, government spending and regulation were diminished and money supply was kept tight.

A boom ensued under Presidents Calvin Coolidge and Herbert Hoover — and then, the Crash.

Liberal followers of John Maynard Keynes took over in 1933 and stayed dominant until the late 1970s. Massive government intervention — fiscal and regulatory — and high tax rates failed to end the Great Depression, though World War II did.

And the formula continued to work until the 1970s, when it was undone by “stagflation” — simultaneous high unemployment and soaring inflation — for which the Keynesians had no answer. They admitted it.

The country got out of that crisis by returning to “classical” principles, renamed “supply-side economics.” With lower tax rates, diminished regulation, lower trade barriers and monetary restraint, the economy boomed again from 1983 to 2000.

Forty million jobs were created during the administrations of Presidents Ronald Reagan, George H.W. Bush and Bill Clinton, but even so, the seeds of our present crises were germinating.

Globalization reduced prices, but sent manufacturing jobs overseas and undercut wages for all but the most highly skilled. Technological advances did the same.

According to the U.S. Census Bureau, incomes for the richest 10th of the population rose 35 percent from 1981 to 2009. For the bottom 50 percent, the increase was less than 10 percent.

Wages for men with only a high-school education dropped by half from 1969 to 2009. Even for those with some college, there was a 33 percent decline.

Numerous academic studies have shown that the ability of lower-income Americans — especially men — to rise to a higher level than their parents is less than in Canada or (until recently) much of Western Europe.

And as the conservative sociologist Charles Murray graphically demonstrates in his book, “Coming Apart,” the white rich and the white working class are increasingly living different lives.

Less than 5 percent of white college-educated women have children out of marriage, compared with 40 percent of those with just a high-school diploma — higher even than the black out-of-wedlock birthrate (25 percent) in 1965, when Daniel Patrick Moynihan wrote his famous report on the crisis of the black family.

Murray attributes the decline of working-class values to coddling by government welfare programs. But lack of good jobs — and the excellent education need to qualify for them — seems the likelier explanation.

It all spells long-term trouble. “Declinists” say it’s inevitable and means the end of the American Dream.

Obama’s Keynesian prescriptions — dubbed “middle-out” economics — aren’t solving it. And Republicans’ supply-side answers aren’t either. Opportunity is not trickling down, and a rising tide still leaves many boats on the bottom.

If the parties worked together on an amalgam — say, containing retirement costs for seniors and investing in world-class education for young people, encouraging the private sector to rebuild America’s infrastructure and cutting employment taxes — we might find a way out.

But Obama, for all his good intentions (and some good ideas), can’t engender cooperation. And Republicans are more interested in undermining him than in helping the country.

  • Connor Vlakancic

    This M.Kondracke write is well-said but damn sad for a Jack Kemp Scholar. His questions are clearly described as huge frustrating for all current politics-as-usual intelligentsia, but he then fails to grasp his opportunity to make his direct request/offer for whoever may be America’s Lech Wałęsa to emerge in the media main-stream with CONTACT ME DIRECTLY, I will personally sift thru the chaff to find America’s unsprouted grain of wheat.

    Merely, Nothing more than; “Add a comment” into the blog-cloud.

  • superduckz

    Shame on you Mort for downplaying the absolute horror that increased federal regs have heaped on this economy. You also know as well as anyone that you’ve misrepresented supply side economics here. A partial straw man description of what it actually represents philosophically is beneath you. It’s NOT an increase in regs, it a full on choke hold of any chance at middle class economic recovery.

    • Leftcoastrocky

      regs help protect the workers and the environment

  • Leftcoastrocky

    Time for the country to have an all out focus on improved manufacturing

  • Leftcoastrocky

    Infrastructure, R&D and education

    Infrastructure, R&D and education

  • Leftcoastrocky

    U.S. companies (aside from financial institutions) are sitting on $1.7Trillion — imagine if they just invested 10% of that in expanding existing businesses and in investing in new ones.

  • James_G

    what a true liberal idiot this guy is – it isn’t the lack of education – it is the lack of desire for AN EDUCATION that keeps the poor, it is their culture of drugs, crime, and always blaming their own poor choices on “The Man”. The US spends more per child on education then any other country but we have fallen far behind. Schools don’t teach skills and facts, they are tools to try and enforce social agendas for the GLBT and Atheist/Humanism supporters. Government doesn’t produce, it leeches off society, and as Detroit shows, that is unsustainable. Until the true problems are addressed, morals, culture, and ethics, and until government stops encouraging a work ethic that allows and supports between 20-30% of Americans to be dependent on the Government for their way of life the situation will only worsen.

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