Why Did Republicans Stop Acknowledging The Economic Importance Of Demand?

September 02, 2011 2:35 pm ET — Jamison Foser

With the nation facing a stagnant economy and a bleak unemployment situation, economists have long made clear that a key part of the problem is a lack of demand: People aren't spending money, in part because so many of them don't have jobs, so businesses don't have reason to hire more workers, and the two problems feed off of each other. 

Grover Norquist

Republicans, on the other hand, insist that businesses would like to hire people but can't afford to due to excessive taxes and onerous regulations — a contention that is undermined by the fact that businesses are sitting on piles of money — and pretend that demand doesn't have anything to do with anything. So they oppose policies that could stimulate demand — hiring people to fix roads and bridges, for example, or extending unemployment benefits, or offering mortgage relief to struggling homeowners.

The refusal to recognize the concept of demand is in many ways even more bizarre than the Republicans' pretense that if we give already-profitable companies even more no-strings-attached legislative favors, they'll finally start to hire people instead of pocketing the money. Even an eight-year-old with a lemonade stand knows that if nobody is buying, it doesn't make sense to hire the neighbor to help pour drinks. And a survey of small business owners conducted by the National Federation of Independent Business shows they know the same thing: More named "Poor sales" as their biggest problem than anything else.

That's particularly noteworthy given the source. Republicans idealize "small business owners" almost as much as unnecessary wars, and the NFIB is a conservative organization that backs GOP policies more reliably than the interests of the small businesses it claims to represent. So when NFIB says small business owners think lack of demand is their biggest problem, you'd think Republicans would listen. But they don't.

It wasn't always like this. Republicans used to acknowledge the role that demand plays in the economy. And not just the kind of 1960s northeastern Republicans today's GOP sneers at in order to keep Grover Norquist happy. Republicans like... Grover Norquist. Here's a Washington Times op-ed Norquist co-wrote in November 2001:

One part of the answer: A national sales tax holiday to kick off the Christmas shopping season. It's "fair," it's temporary, and most importantly, it will provide exactly the kind of immediate stimulus our shell-shocked economy needs now.

The problem economic policymakers face today is nearly unprecedented. While the U.S. economy remains fundamentally sound, consumers, jacked in to "America at War" on their TV sets and worried about their jobs, are afraid to spend. Same-store sales are down between 10 percent and 20 percent at major U.S. retailers compared with a year ago. High-tech, which was in a virtual depression before September 11, is especially hard-hit, with companies like Gateway2000 and Sun Microsystems issuing repeated earnings warnings and layoff announcements. As CEA Chairman Glenn Hubbard put it, economic stimulus is needed "sooner rather than later."

Not only did Norquist recognize the economic importance of demand, he even used the word "stimulus" as something other than a punchline. Norquist being Norquist, he (like other Republicans) focused on increasing consumer spending via tax cuts rather than by increasing unemployment benefits or putting people to work improving the nation's infrastructure. But at least he was talking about increasing demand, unlike today's GOP.

Then-President George W. Bush shared Norquist's belief in the importance of demand. In August of 2001, Bush was talking up tax rebate checks he hoped consumers would spend to stimulate the economy:

As 112 million Americans cash nearly $40 billion worth of federal tax rebate checks in the weeks ahead, President Bush is hoping they'll spend every nickel of it — and fast. That's one of the best ways, Bush contends, to snap the economy out of its current stupor. And economists agree that the rebates could help.

"This tax relief package is going to help our economy recover," Bush told students last week at the Crawford Elementary School near his Texas ranch, "and that's going to be important."

The president also visited a Target store in Kansas City to chat with shoppers about how they were spending their rebate checks. [Cox News Service, 8/26/01]

After the September 11, 2001, terrorist attacks, President George W. Bush repeatedly urged Americans to help stave off economic trouble by going shopping. In his September 20, 2001, address to Congress, Bush told the nation:

I ask your continued participation and confidence in the American economy. Terrorists attacked a symbol of American prosperity; they did not touch its source. America is successful because of the hard work and creativity and enterprise of our people. These were the true strengths of our economy before September 11, and they are our strengths today.

Two days later Jeb Bush, then the governor of Florida, made clear that consumers "participation in the American economy" wasn't about people getting through stressful times with a little retail therapy — it was about strengthening the economy:

Gov. Jeb Bush warned Saturday that the national economic downturn following last week's terrorist attacks could soon lead to some Floridians losing their jobs.

"That troubles me more than I can describe to you," Bush said after a day of meetings with tourism industry leaders in Miami.

Florida tourism, the state's biggest industry at $50.7 billion annually, is experiencing an unprecedented free-fall following last week's terrorist attacks. [...]

"We need to respond quickly so people regain confidence and consider it their patriotic duty to go shopping, go to a restaurant, take a cruise, travel with their family," Bush said. "Frankly, the terrorists win if Americans don't go back to normalcy." [Associated Press, 9/22/01] 

President Bush also stressed the importance of consumer spending in signing a ban on taxes on online purchases:

Citing the need to spur e-commerce during the holiday season, US President George W. Bush on Wednesday signed into law a two-year extension of a ban on Internet taxes. [...]  In his statement, Bush also said that encouraging shopping is particularly crucial this year, with the US economy officially in a recession that threatens to deepend amid security fears in the wake of September 11 terrorist strikes. [Agence France Presse, 11/28/01]

Meanwhile, Sen. Olympia Snowe (R-ME) proposed a sales tax holiday to encourage spending and improve the economy:

We also know that one of the key components of any stimulus package has to be spurring consumer investment. That's certainly something that we heard from Chairman Greenspan, Secretary O'Neill, former Secretary Rubin. And we can't think of a more ideal proposal than the national sales tax holiday to do just that. The effect on the economy would be immediate. The return would be guaranteed. And certainly it would be the best approach to stimulating and spurring consumer investment in this country. And that's obviously going to be important to rejuvenating this economy. [...]

From economists, Arthur Laffer did an extensive column on this in the Wall Street Journal recently, and he, in fact, indicated it's one of the best short-term stimulus ideas that he has seen in a long time. In fact, he went on to say "Those people who criticize the fact that people would change the timing of their purchases just don't get it. Changing both the timing and the volume of purchases is the whole point to stimulating the economy." Exactly. We're trying to change short-term behavior, and a sales tax holiday would do exactly that. [...]

[T]he sales tax holiday is a guarantee that, you know, that consumers, you know, will spend money. What I like about this proposal is the government doesn't spend money if the consumers don't. So, it's not a sort of a chancy proposition. You're not throwing money at a problem without knowing whether or not you're going to address the problem. And in this case, we only spend money if consumers do. [Snowe Press Conference, 11/30/01]

Note that Snowe repeatedly stressed the importance of stimulating the economy through measures that would "guarantee" that consumers spend money. That's in stark contrast to the current GOP approach of giving tax cuts to business and the wealthy who won't spend it rather than helping poor people who will. Here, for example, is Snowe just last month, calling for corporate tax cuts, even though corporations have been sitting on strong profits in recent years rather than using them to hire, and even though the effective corporate tax rate is in line with that of other countries. And today Snowe responded to the new jobs report by calling for "regulatory reform" that would "provide our nation's job creators with the freedom and confidence they require to hire more workers." Where once Snowe spoke of the need to get money to people who were guaranteed to spend it, she now peddles a convoluted Rube Goldberg scheme to do legislative favors for big business in hopes that they use the financial windfall to hire additional workers, even though there still won't be sufficient consumer demand to justify doing so.

Snowe's statement today is particularly noteworthy for lacking any reference, even indirect, to the concept of demand. Just ten years ago, the nation's most conservative leaders — like George W. Bush and Grover Norquist — emphasized the need to boost demand in order to strengthen the economy. Now even the most (supposedly) moderate Republicans, like Olympia Snowe, pretend they've never heard of the concept of demand.

So what has changed? What has caused Republicans — including supposed responsible moderates like Olympia Snowe — to suddenly forget the concept of economic demand, even as economists stress over and over again the need for stimulus that increases demand, giving business a reason to hire? Is it collective amnesia? Or could it possibly be that during the Bush administration, Republicans had a political interest in improving the economy, but during the Obama administration, they have political incentive to thwart economic progress?