The thing that’s important to keep in mind is that most Republican politicians, for all their supply-side rhetoric, are still Keynesians. They believe that the prime mover of the economy is government spending, since C+I+G = GDP. Consumption + Investment + Government Spending = Gross Domestic Product. C and I are outside of their direct control, so therefore, G must be increased if the economy is going to grow in a dependable manner.
This is all the more true since I = S. Investment = Savings, but American savings are actually negative, since people are spending more money than they are earning thanks to low interest rates and easy debt. The post-1991 economic boom has entirely consisted of debt-funded C + lots of G + foreign I.
Now here’s where we’re looking at trouble. In order to pay off the interest on old I, the dollar is dropping off a cliff. This is why foreign I has dried up – remember, domestic I is nonexistent – except for the Japanese, who are playing their own bizarre Keynesian game. C can’t increase much more, since everyone has already refinanced their homes several times, blown all their equity and are in debt up to their eyeballs. This leaves two alternatives, rampant inflation or a massive increase in government spending. It looks to me as if the decision has been made to pursue both at once, which shows that things may be extraordinarily fragile. Without this spending, George Delano’s advisors believe the economy will tank before November despite the modest increase in C derived from the tax cuts. They don’t care what they spend it on, just so it gets spent.
However, the negative reaction of the conservative base appears to be causing the Republican braintrust to rethink this strategy, which means that either a) they’ll take the chance that conservatives will stay home and announce more spending; or b) they’ll announce new tax cuts to attempt to stimulate C enough to make up for what they hoped to achieve by increasing G. In either case, expect federal debt to increase dramatically.
Of course, the deeper problem is that the entire Keynesian macro model is total nonsense, so the very conundrum is a false one, but until we’ve got Austrian-school economists from the Mises Institute in the White House, this analytical model should be useful for understanding political behavior as the Season of False Promises draws nigh.
Thus endeth the lesson.