Thursday, April 21, 2005

Difference between Democratic and Republican Economics

Here is a really insightful statement from Kevin Drum.

[…]the Republican economic vision quite correctly: I'd say that its key tenets are sound money (i.e., low inflation) and small government. In practice, this translates into a preference for tight monetary policy and low taxes on capital. Neither of these directly drives economic growth, though, which is why the economy routinely does poorly under Republican presidents.

But what about Democrats? If I had to describe Democratic economic vision in only a few words, I'd say its tenets are full employment and a thriving middle class. Regardless of the policy choices that various administrations have used to pursue these goals — which include such disparate things as Social Security, the minimum wage, support for labor unions, and the Earned Income Tax Credit — these two things do directly drive economic growth. This is why the economy does better on practically every measure you can think of under Democratic presidents. It's not a coincidence, it's a result of the fact that the things liberals care about really do drive growth.

Unfortunately, "full employment" is practically an archaic term these days, one that probably has more negative than positive resonance even among those who would benefit from it. As for taxes, the middle class has largely been hoodwinked into believing that low taxes on capital are actually good for them — or that they shouldn't worry about economic policy at all and base their votes instead on important stuff like gay marriage or gun laws.


It is my opinion that neither the Republicans nor the Democrats are wrong. The difference is in the point of view each takes. If you take the point of view of what makes an individual business or even an industry successful, the Republicans are correct to focus on balancing the budgets of the businesses and lowering costs (which means avoid the demands of government.) These things build individual businesses.

But they do not build an economy. An economy is built on full employment and a thriving middle class. The government will have to do things like forcing accurate financial accounting, forcing companies to pay for costs of production that they would otherwise externalize such as workman’s compensation for industrial injuries, preventing dumping of waste that injures people or destroys the common areas of the environment, and allows labor to organize to gain sufficient power to deal with the inherent power of large businesses, etc. All of these efforts help to build a better society and overall economy, but they are things businesses prefer not to spend money on.

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