Paul Craig Roberts: Delusions Prevail In Washington

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. . . . http://www.informationclearinghouse.info/article19125.htm

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