Greg Ip: The Republicans’ New Voodoo Economics?

Greg Ip: The Republicans’ New Voodoo Economics?:

Greg Ip:

The Republicans’ new voodoo economics?, by Greg Ip, Commentary, Washington Post: When John McCain was running for the Republican presidential nomination nearly 12 years ago, he declared that Alan Greenspan was so critical to the economy that, if the then-Federal Reserve chairman died, he’d put sunglasses on the body, prop him up and hope no one noticed. It’s safe to say that GOP opinions of the Fed have slipped a bit since. ...

If Republicans dislike monetary stimulus, they loathe its fiscal cousin even more... They want balanced budgets, the sooner the better. ... This, too, is at odds with the party’s earlier views. The administration of George W. Bush sold its 2001 and 2003 tax cuts as Keynesian-style economic stimulus. Lawrence Lindsey, a top Bush adviser, even likened opponents of the tax cuts to President Herbert Hoover, whose obsession with balancing the budget in 1932 worsened the Great Depression.

Certainly, some of this rhetoric is just political opportunism. ... But something more fundamental is going on: The economic ideology of the Republican Party has changed in recent years... In their view, the government has no more role meddling in the business cycle than in any other market. ...

This is not to be confused with supply-side economics... The new GOP views actually have a much longer pedigree: They are rooted in an intellectual contest that raged during the 1930s and 1940s, and had long been settled by the opposing side.

Before then, orthodox economics held that the economy was self-correcting. ... The Great Depression shattered that orthodoxy, as high unemployment became entrenched... John Maynard Keynes convincingly argued that when interest rates were zero — a condition he termed a “liquidity trap” — the economy’s self-correcting properties did not operate. The best solution, he argued, was a burst of public spending to restore demand and employment. ... Keynes’s views ... won out and came to dominate postwar economic policy. ...

Many Republicans consider the tepid economic recovery an indictment of Keynesianism... They argue that aggressive fiscal and monetary stimulus have made things worse by generating uncertainty among firms and investors, and that austerity would put things right.

They almost surely have it wrong...