Nugent explains Reagan-Bush Economics

I love it when rightwingers fight with each other. Tom Nugent reads and then objects to something from the WSJ oped pages:

A recent Wall Street Journal editorial excoriated four Republican senators for opposing President Bush’s proposal to cut taxes permanently. While these four Republicans — Susan Collins and Olympia Snowe of Maine, John Chafee of Rhode Island, and John McCain of Arizona — oppose the new tax-cut proposal, the Journal reported that they also voted in favor of a Democratic proposition that would increase educational entitlement spending over the next six years by $35 billion. The Journal’s editorial concludes: ‘These votes show that their real motive in obstructing future tax cuts is to keep the money in Washington so they’ll have more to spend.’

Tom could have ripped the shreds out of this oped quite simply by noting Bush has no plans to cut spending in order to lower it to the level of current taxes (which means we are only shifting taxes onto the future as Brad DeLong notes today). But Tom decides to offer his version of rightwing Keynesian economics instead:

The Journal and the senators all seem to miss the economic principle of aggregate demand. Even with ultra-low interest rates for a number of years, the president’s two tax-cut initiatives, and what many consider to be runaway spending by Congress, there is still substantial excess domestic manufacturing capacity (currently at 77.7 percent), a low percentage of workforce participation, and a recent downturn in commodity and energy prices…What the senators and media don’t get is the basic equation that defines the role of government deficits in the economy: The federal government deficit = non-government savings (of net financial assets). That’s fact, not theory, a.k.a. an ‘accounting identity.’ Non-government savings include that of both residents of the U.S. and foreigners. If the federal budget deficit of $450 billion about equals the current account deficit, it means that all the net financial assets added by the deficit are being saved by foreigners, who desire to hold all those dollar-denominated U.S. financial assets and are willing to net export to us in order to get them.

He is right about us currently being below full employment (something Bush-Cheney is trying to deny). But then Tom goes onto to explain why fiscal stimulus is some sort of prerequisite for staying at full employment, something he and Warren Mosler have argued before. Again Brad DeLong noted how silly their argument is often phrased. But there might be some odd logic to it if you believe that investment is necessarily fixed at a very low level. Never mind that no economist – Keynesian or classical – believes this. Then again – we must remember the rightwing agenda of Mosler&Nugent, which seems to be trying to deny that long-term fiscal stimulus crowds out investment thereby reducing economic growth.