Deficit, Stimulus, and the Political Parties

The conventional wisdom is that Democrats believe in the Keynesian philosophy of using increased government spending as a means of stimulating the economy, whereas Republicans believe that "stimulus" is not the answer (and will balloon the deficit), but rather that burdensome taxes are a drag on the economy, and thus reducing taxes will let the economy flourish. (Feel free to substitute "liberal" for Democrat and "conservative" for Republican, if you like.) I recognize that these are broad generalizations of positions, but they're largely true, and they sound like they are quite far apart.

I am not a sufficiently trained economist to be able to comment wisely on which theory is more accurate, but I think it is worth pointing out that the two models are actually almost exactly the same on all but one count.

First of all, for all of the conservative bashing of "stimulus spending", both plans are all about stimulus. In the liberal model, government spending provides demand that the economy is missing. In the conservative model, people keep more of their money and are thus able to provide more of the demand that the economy is missing (or, alternatively, more money is left in the private sector where it can be invested.) But in both cases, the claim is that it is essentially that the economy benefits because the policy leads to more economic activity.

The theories are actually the same on the deficit as well. Conservatives like to bash liberals for ballooning deficits that result from stimulus spending, but the irony here is that these same conservatives typically advocate large tax cuts. Deficits, however, are indifferent to spending or revenues; a deficit only cares about the gap between the two, and a tax cut of $100 Billion increases the deficit (at least in the short term) but exactly the same amount that a spending increase of $100 Billion does, all else being equal.

Of course, the Democrats defend the deficit-busting spending by pointing out that if it rescues the economy, the economy will grow and generate new revenues which would otherwise be lost to the recession, and these new revenues will ultimately pay for the increased spending. And Republicans make a similar argument, namely that reduced taxes cause the economy to grow, which generates the income necessary to pay for the tax cuts. (Republicans also make the argument that reduced taxes help to "tame the spending beast," which would be great if it were actually true. Unfortunately, empirical evidence strongly suggests that this benefit does not materialize.) In any case, the theories essentially make the exact same argument that their particular form of stimulus ultimately pays for itself (or is, at least, cheaper than not doing it).

The only meaningful difference I can see here is who does the spending, the government or the taxpayers. With the spend-to-stimulate model, you can clearly see that the money is being spent, but there are legitimate questions as to the efficiency and efficacy of such spending. With the cut-taxes-to-stimulate model, the money may not go into economic activity (for example, people may save it or pay down debt), but one can make a strong argument both that people in aggregate are smarter about where to allocate their money than the government is, as well as that allowing people to make these decisions rather than their government is the "right" thing to do.

As I said above, I'm not enough of an economist as to decide this question, but I think this is really the core question that separates the two major parties. Despite all of the rhetoric and other issues around it, it's not actually all that significant of a philosophical difference.