Friday, January 23, 2009

Are the Democrats peddling voodoo economics?

Voodoo economics: a slanderous term used by President George H. W. Bush in reference to President Reagan's economic policies known as Reaganomics. Now know as "trickle down economics" by democrats. Bush used the term voodoo economics to categorize Reagan's strategy of extreme supply side economics. One of the early tenants of supply side economics was that that across-the-board cuts in income-tax rates might raise overall tax revenues.
It now appears that the new theory being espoused by the Obama administration is the use of extreme demand side economics. The theory being that each dollar of government spending can increase the nation’s gross domestic product by more than a dollar. In some arguments the multiplier is as high as 1.5 times.

This has me thinking two things. First, if this is true why don't we spend two trillion dollars instead of one trillion? Second, why are savings in such ill repute that no one is saying a single word about savings. The argument being used right now is that savings do not add to demand--in other words if people save then they don't spend. As I look at past bull markets, they are always preceded by savings. Prior to the latest bull market in the U. S. the savings rate soared to 8 percent. More recently, saving rates have dwindled to zero percent and sometimes less than zero.

I don't think it is a crazy to assume that over consumption and creating artificial demand for things like houses and cars is part of our problem. Our current problems are being caused by the use of credit gone wild. Nevertheless, the government is proposing spending over savings, and by the way, they will borrow the money to do it. On the other hand, when people save they have to invest it somewhere--usually in stocks, bonds, or bank CDs. This helps the economy grow and creates jobs because these savings get invested directly into companies or in the form of loans by banks to companies.

The articles by economist for and against the stimulus package are coming out rapid fire. Here are a few that are very thought provoking.

Is Government Spending Too Easy an Answer?
Government Spending Is No Free Lunch
Let's Stimulate Private Risk Taking

Source All American Investor