Basic economics

As I don’t have to tell you, the U.S. economy is less than healthy, and the immediate reason for this is a lack of demand. Our corporations are collectively sitting on more available cash than at any time in history, and they could borrow even more money at record low interest rates if they wanted to. But there’s no point in hiring people or expanding the business when there aren’t customers willing and able to buy.

One thing the government can do to help is to get more money into the hands of ordinary consumers, for example by cutting taxes. Unfortunately, cutting taxes on the rich is relatively ineffective because the rich already have plenty of buying power (that’s what being rich means!) and they have a greater tendency to put extra money into investments rather than spend it.

We know this from experience: A decade ago the Bush administration introduced two rounds of tax cuts favoring the rich, not to mention reducing regulations on high finance so bankers and brokers could “innovate,” and promised that this would lead to faster growth. The wealthy made out very well, but for the rest of us the economy was sluggish with very little job creation. Then, in Bush’s last year in office, a collapse of the financial markets, a collapse directly triggered by toxic “innovations” such as collateralized debt securities and credit default swaps, sent the economy into the worst tailspin since the Great Depression.

Economic growth resumed after Obama pushed through additional tax cuts that benefited all tax brackets more or less equally and introduced some additional spending, but as economists such as Paul Krugman warned at the time, the stimulus was too tiny relative to the problem. In fact, the spending part was pretty much offset by cutbacks at the state and local levels.

One thing that has helped keep demand from falling even lower is the extension of unemployment benefits. With job seekers far outnumbering jobs, it’s the only things keeping some families going. Families without jobs or working only part time are also able to get a small amount of help from the government toward buying groceries. (I have the impression a lot of people think that food programs are very generous. They aren’t. Look it up.)

All the foregoing should be common knowledge, but I regret to say that some on the right are, perhaps out of mere anti-government reflex, trying to deny it. The folks at Media Matters have collected some examples. Fox News has even ridiculously called food stamps and unemployment insurance — all-American programs historically supported Republicans as well as Democrats — “socialism.”

For more examination of this economic illiteracy, see this piece by The Washington Monthly’s Steve Benen, and also this piece by him from 2009. The latter points to an economic analysis, by the commercial firm Moody’s, of the relative practical benefits of different types of government action to improve the economy. To summarize Moody’s judgment, things like extending the Bush tax cuts produce very little additional economic activity. The current payroll tax holiday (a tax break for working people that a lot of Congressional Republicans oppose extending, by the way) is considerably better.

But dollar-for-dollar, according to Moody’s, the most effective way to get people buying and the economy moving is to help people in need buy food and help the unemployed survive while job hunting. This means bills gets paid and groceries bought, so, for example, grocery stores hire more people and buy more from food producers, who in turn need to hire more people as well, and all those newly employed people spend their paychecks, which leads to some of that increased demand the economy desperately needs.

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