A Stimulus to What?
Delusions Prevail in Washington
Farewell to Supply-Side Economics
By Paul Craig Roberts
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
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
Meanwhile, Congress passed a $700 billion “defense” bill so that
the Bush administration can continue its wars in the Middle
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.
Roberts was Assistant Secretary of the US Treasury for Economic
Policy in the Reagan administration. He is credited with curing
stagflation and eliminating “Phillips curve” trade-offs between
employment and inflation, an achievement now on the verge of
being lost by the worst economic mismanagement in US history.
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