Did Republicans ever care about fiscal responsibility?

The US needed fiscal stimulus almost a decade ago when it was on the brink of Depression 2.0 - not now!

The mental gymnastics involved in reconciling Republican opposition to fiscal stimulus after the GFC, and their willingness to accept it now, is actually amazing.

"We're worried about the debt!"

After the GFC, when unemployment in the US peaked at 10%, Republicans threatened to not increase the debt ceiling if spending cuts weren't enacted. Cuts. During a depressed economy. There were plenty of excuses - fiscal responsibility, the risk of crowding out the private sector and driving up interest rates, they even attacked the Fed's monetary stimulus as risking hyperinflation and "debasing the currency".

Just to be clear - none of these things happened. It was a depressed economy. There was no private sector activity to crowd out. Nor does monetary stimulus create inflation or debase the currency during a depressed economy - something they would know if they understood economics. And as for fiscal responsibility, their unwillingness to allow fiscal stimulus during a depressed economy - when fiscal multipliers make fiscal policy extra effective - actually prolonged the slump, delaying the recovery in government tax revenues, thereby actually worsening the long term debt situation. This was evidenced even better by the natural experiment of European austerity during their debt crisis. As John Maynard Keynes once said, "the boom, not the slump, is the time for austerity at the Treasury". No matter what your priority is - debt, unemployment, growth - austerity during a depressed economy is precisely the opposite of fiscally responsible. 

So between the GFC and last year, Republicans were apparently completely economically inept. But at least they were consistent about it.

"What, me worry?"

But ever since President Trump, Republicans have jumped on the fiscal stimulus bandwagon. They are more than willing to accept massive new fiscal deficits (over $1 trillion - that's per year, not total debt) bigger than anything that happened under Obama's budgets when deficits were largely cyclical, not structural.

Firstly, it's not even a good kind of stimulus. The Trump tax cuts massively favour the rich, and any cuts enjoyed by the poor and middle classes expire within 10 years and actually become tax increases. Trickle down economics doesn't work. Tax cuts that favour the rich will worsen inequality which can actually be contractionary, not stimulatory. And inequality in the US is already at levels not seen since pre-revolutionary France - remember what the disenfranchised masses did to the likes of Marie Antoinette? And as for the Trump infrastructure plan, a lot of it seems to be private sector tax concessions and privatisation of public assets, not a lot of actual new investment or infrastructure (except perhaps the border wall, the problems with which I won't even begin to discuss here).

So for minimal stimulus (if not actual contraction), the US will endure massive new debt, which Republicans have already started to use to justify massive cuts in social expenditures. And this will worsen inequality and general economic growth even further.

But even if we assumed these measures were stimulatory, why are Republicans suddenly okay with them now? The economy is approaching or at full employment. Unemployment is down to 4.1%. Wage rates are increasing (ironically the trigger of the recent stock market plunge). People are voluntary quitting their jobs at pre-GFC rates (something that people generally don't do if they're not confident about finding a new job). And the Fed is in the process of increasing interest rates to combat imminent inflation. While the Fed couldn't easily lower interest rates to offset the contractionary effects of fiscal austerity after the GFC (interest rates were already at zero), they can and will increase interest rates now, actually reducing any stimulatory effects of the current tax and infrastructure plans.

"They are providing more stimulus to an economy with 4 percent unemployment than they were willing to allow an economy with 8 percent unemployment" (Paul Krugman). Any stimulus now actually will accelerate the pace that the Fed has to increase interest rates, drive down fiscal multipliers and crowd out the private sector. And this is in combination with both the Fed's and the European Central Bank's plans to normalise their balance sheets (sell their assets). This sudden influx of central bank assets and new government debt onto the market will force government borrowing costs to rise even faster to encourage people to keep buying these assets and lending to the government.

Expectations of accelerated future inflation and interest rates from these plans may have even driven the recent stock market plunge and a potential upcoming crash. Moreover, this spending spree will reduce the government's fiscal space to borrow during the next crisis when stimulus really will be needed again. Accepting greater debt for the purpose of economic stimulus is precisely what the US needed almost 10 years ago - but not now.

So are Republicans hypocrites or just obstructionist liars?