I respectfully disagree with Dr. Taylor's analysis that the debate between the Tea Party and Liberals is about fear or anger. I think it is about how to prop up the U.S. economy, which has been faltering. Liberals want to stimulate the economy with deficit spending, while the Tea Party wants to reduce the federal deficit to encourage private investment. Academic economists debate this issue; as far as I can tell, nobody knows for sure what is the right path. The financial markets, however, may force the adoption of the Tea Party solution. At least this is what is happening now in Europe.
The central policy issue before the country -- indeed the world -- is how to cope with the loss of wealth caused by the decline in home and stock prices. The estimates I saw suggested that 17 trillion dollars in wealth was destroyed in the recent recession. Since the housing market is showing signs of a possible second move down, the Wall Street Journal reported today (June 20) that the Federal Reserve is considering its options if deflation occurs. ("Deflation" is what happened during the 1930s depression.)
Liberals favor deficit spending to stimulate the economy. They embrace the theory that government must create the credit that was destroyed in the private sector. Today's editorial in the N.Y. Times calling for more stimulus to help the unemployed is a good example of the liberal position.
The Tea Party believes that the best way to rebuild our economy is to restore fiscal discipline to Washington -- that is, to cut the federal deficit by reducing social programs such as welfare and pensions. They believe that when the private sector sees that Washington is pursuing sound money policies, private investment will improve, creating real jobs. The Tea Party dismisses the low-paying unskilled jobs created by "stimulus" spending as unhelpful since the jobs are temporary, the funding is borrowed, and the increased debt will have to be repaid in the future.
Which policy will "win" may depend on the financial markets, not on psychological analysis. Deficit spending (liberals call it "stimulus') requires that wealthy investors buy government bonds. If the investors refuse to buy bonds -- or demand high interest rates -- liberalism shrinks. A few weeks ago the financial markets refused to lend to Greece, forcing that country to reign in its liberal policies. Angry liberals took to the streets killing three innocent people. The euro went into an unusually rapid descent for a major currency. The markets are forcing Europe to reign in its social programs to cut deficit spending. Europe is now promising to move in the direction of fiscal restraint, which is the direction advocated by the Tea Party.
The key point readers need to understand is that liberalism (that is, the social safety net) is funded with borrowed money. If financial markets become concerned about the creditworthiness of a liberal government, the markets refuse to lend money at reasonable interest rates, and the government must cut services or risk a depression. This is what is happening now in a number of states trying to balance their budgets such as California.
America is facing a catch 22. If we continue to spend stimulus funds, at some point the markets may refuse to lend the money. If we try to balance the federal budget, the cut in spending could send the economy into a tailspin.
