Bush To Abandon Supply-Side Economics?

With his

tax rebate policy, President Bush has put economic
policy back on a Keynesian basis.  Will it work?

During the two decades it was in effect,

supply-side economics had restorative effects on the
American economy.  Its predecessor, Keynesian demand
management, stimulated demand more than supply. 
Consequently, over time the trade-offs between
employment and inflation worsened, and for a while it
appeared that inflation and unemployment would rise
together.  The breakdown of the Keynesian policy opened
the door for the Reagan administration`s supply-side
approach.

By following Nobel economist Robert Mundell`s advice
to

"reverse the policy mix," the supply-side policy
allowed the US economy to grow without paying for the
growth with rising rates of inflation.  However, the new
macroeconomic policy was not a cure-all, and its success
in banishing worsening

"Philips curve" trade-offs between inflation and
employment masked the appearance of new problems, such
as the loss of jobs and GDP growth to

offshoring, problems from deregulation, and the
growing

concentration of income in fewer hands.

The Bush administration is turning to tax rebates,
because problems in the financial system and the amount
of consumer debt hinder the Federal Reserve`s ability to
pump money to consumers through the banking system. Like
an easy credit, low interest rate policy, the purpose of
a tax rebate is to put money in consumers` hands in
order to boost consumer demand. 

Will consumers spend the rebate, or will they use it
to pay down their debts?  If they spend the rebate on
consumer goods, will it provide much boost to the
economy?  

Many Americans are overloaded with debt and will have
to use the rebate to pay down credit card debt. The gift
of $800 per means-tested taxpayer is really just a
partial bailout of heavily indebted consumers and credit
card companies. 

The percentage of the rebate that survives debt
reduction will be further drained of effect by
Americans` dependency on imports. According to reports,
70% of the goods on Wal-Mart shelves are made in China. 
During 2006, Americans spent $1,861,380,000,000 on
imported goods, that is, 23% of total personal
consumption expenditures were

spent on imports (including offshored goods). 
This means that between one-fifth and one-fourth of new
consumption expenditures will stimulate foreign
economies. 

Americans worry about their dependency on imported
energy, but the $145,368,000,000 paid to OPEC in 2006 is
a small part of the total import bill.  Americans
imported $602,539,000,000 in industrial supplies and
materials; $418,271,000,000 in capital goods;
$256,660,000,000 in automotive vehicles, parts and
engines; $423,973,000,000 in manufactured consumer
goods; and $74,937,000,000 in foods, feeds and
beverages.

The Keynesian policy of driving the economy through
consumer demand was applied to a different economy than
the one we have today.  In those days the goods
Americans purchased, such as cars and appliances, were
mainly made in America. Construction workers were not
illegals sending their

wages back to Mexico.  The US had a robust
manufacturing workforce.  When consumer demand weakened,
companies would reduce their output and lay off
workers.  Government policymakers would respond to the
decline in employment and output with monetary and
fiscal policies that boosted consumer demand. As
consumer spending picked up, companies would call back
the laid off workers in order to increase output to meet
the rising demand.  

Today Americans are losing jobs for reasons that have
nothing to do with recession.  They are losing their
jobs to offshoring and to foreigners brought in on work
visas.  Today many American brands are produced offshore
in whole or part with foreign labor and imported to the
US for sale in the American market.  In 2007, prior to
the onset of the 2008 recession, 217,000 manufacturing
jobs were lost.  The US now has fewer manufacturing jobs
than it had in 1950 when the population was half the
current size. 

US job growth in the 21st century has been confined
to low-pay domestic services.  During 2007, waitresses
and bartenders, health care and social assistance, and
wholesale and retail trade, transportation and utilities
accounted for 91% of new private sector jobs.  

When a population drowning in debt is hit with
unemployment from recession on top of unemployment from
offshoring, will the people spend their rebates in
eating places and bars, thus boosting employment among
waitresses and bartenders?  Will they spend their
rebates in shopping malls, thus boosting employment for
retail clerks?  If they become ill, the lack of medical
insurance will direct their rebates to doctors` bills. 

Economists and other shills for globalism told
Americans not to worry about the loss of manufacturing
jobs.  Good riddance, they said, to these "old
economy" jobs. 

The "new economy" would bring better and
higher paying jobs in technical and professional
services that would free Americans from the drudgery of
factory work. 

So far, these jobs haven`t shown up, and if they do,
most will be susceptible to offshoring, just like the
manufacturing jobs.  

The Bush administration has in mind a total rebate of
$150,000,000,000.  As the government`s budget is already
in deficit, the money will have to be borrowed.  As the
US saving rate is about zero, the money will have to be
borrowed abroad.

Foreigners are already concerned about the US
government`s indebtedness, and foreigners are bailing
out some of our most important banks and Wall Street
firms that foolishly invested in subprime derivatives.  

Under pressure from budget and trade deficits, the US
dollar has been losing value against other traded
currencies.  Having to borrow another $150 billion
abroad will further erode the dollar`s value.

Meanwhile, Congress passed a $700 billion
"defense" bill so that the Bush administration can
continue its wars in the Middle East.  

Our leaders in Washington are out to lunch.  They
have no idea of the real challenges our country faces
and America`s dependence on foreign creditors.  

The rebate will help Americans reduce their credit
card debt.  However, adding $150 billion to an existing
federal budget deficit that will be worsened by
recession could further alarm America`s foreign
creditors, traders in currency markets, and OPEC oil
producers.  If the rebate loses its punch to consumer
debt reduction, imports, and pressure on the dollar,
what will the government do next?

As long as offshoring continues, the US cannot close
its trade deficit.  Offshoring increases imports and
reduces the supply of potential exports.  With
Washington`s Middle East wars, with private companies
ceasing to provide health coverage and pensions, with
political spending promises in an election year, and
with recession, the outlook for the federal budget
deficit is dismal as well.  

The US is moving into a situation in which the
government could find it impossible to close the twin
deficits without massive tariffs to curtail imports and
offshoring and without pursuing peace instead of war. 
The outlook for the United States will continue to
worsen as long as

hegemonic superpower and

free trade delusions prevail in Washington.  

COPYRIGHT

CREATORS SYNDICATE, INC.

Paul Craig Roberts
[email
him] was Assistant
Secretary of the Treasury in the Reagan Administration.
He is the author of

Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington;
 Alienation
and the Soviet Economy and

Meltdown: Inside the Soviet Economy,
and is the co-author with Lawrence M. Stratton of


The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice. Click

here for Peter
Brimelow`s Forbes Magazine interview with Roberts
about the recent epidemic of prosecutorial misconduct.