The stimulus package and its opponents

This is why bipartisanship did not work on the stimulus package, in my opinion.

The Democrats and the Republicans have two entirely different theories about how the economy works. These theories, strongly held on both sides, determine what each party believes is the best way to deal with the current economic downturn.

The Republicans believe that market conditions are self-correcting--this theory is sometimes known as the "invisible hand of the market." If the market goes down, demand will shrink until prices begin to fall. When prices fall sufficiently, demand will rise again, and the downturn will become an upturn. In their opinion, the best thing the government can do in a downturn is to get out of the way and let the market work smoothly, doing only whatever is necessary to prevent absolute want. Part of that getting out of the way is reducing taxes, to put more money in the hands of businesses and individuals. The great economic theorists that support these beliefs are Adam Smith and Joseph Schumpeter.

Most Democrats believe that all of the above is true
most of the time. But, in exceptional circumstances, they believe that the market may lose the power to self-correct. In other words, the normal cycles of ups and downs predicted by Smith and Schumpeter may, under certain circumstances, run out of control. One of the things that might cause this is a structural flaw in the market system. In such a case, the government can't just get out of the way of the market, because the market will spiral down to catastrophe, as it did in Germany prior to the rise of the Nazis. When such a "death spiral" begins, they think the only force that can prevent it is for the government to create and pump stimulus in the form of deficit spending (to be repaid when the crisis is over). The gurus of this view are John Maynard Keynes, Paul Krugman, and Joseph Stiglitz.

The Republicans believe that most of the predictions that we are entering a "death spiral" at the present time are overblown and alarmist. Yes, things are bad, but in their view, not so bad as to require huge deficit spending. Indeed they fear such spending will create huge inflationary pressure once this downturn comes to its natural end, as they think it will. They believe that the markets will indeed self-correct.

The Democrats believe the subprime mortgage crisis and the resulting blow to bank liquidity have created the kind of structural flaw that will prevent the markets from self-correcting. They point flaws in the banking system in 1929 caused by a lack of a system for guaranteeing bank deposits. These flaws meant that when the banks wished to inject capital in the markets, they could not, and that the same conditions exist today. Therefore, they believe that only quick, massive, and decisive action by the government can prevent the "death spiral" which they fear we have begun to enter.

Notice that these viewpoints make it very hard to compromise. If you believe we are not yet in an out-of-control situation, as most Republicans believe, then you think all this huge stimulus will do is create a huge wave of inflation in a few years. High inflation is a very cruel thing, especially for the poor.

On the other hand, if you believe we are in a systemic crisis, as most of the Democrats believe, you think that if we fail to act strongly now, we will create a situation that may be uncorrectable for many years--years of joblessness and misery.

Please note that there are degrees of agreement with both theories in the academic community and in the political community as well. Some Democrats (who voted against the stimulus in the House) are not convinced the situation is out of control. Some Republicans (the 3 who voted for the stimulus bill in the Senate) believe we may indeed be getting to a crisis point.

Both sides are sincere, I think. They sincerely hold views that lead them to opposite conclusions as to the best way to act. They are not traitors or buffoons, but principled people who disagree.

For the record: I have attempted to put the views of both sides as neutrally as I could. I personally think the banking crisis points to a serious structural flaw in the market system and that the danger of an out-of-control economic fall is real; in other words, I agree with the Democrats. Indeed, I believe that the current stimulus bill is, if anything, much too small. Nevertheless, I respect the positions of those who agree with the Republicans, and deplore the nasty tone and vicious attacks that BOTH sides have engaged in.