The fight between Keynesians and free-marketers over the best way to handle the economy in a recession is decades old. Keynesians say that government spending will drive demand, thus stimulating the economy while also creating large deficits.
Alberto Alesina, an economics professor at Harvard, writes at the Wall Street Journal that the empirical evidence shows that cuts in government spending and tax rates are what boosts an economy (not Keynesian economics) by analyzing 200 fiscal adjustments in 21 countries over the last 40 years:
Politicians argue for increased stimulus spending, as opposed to spending cuts, on the grounds that it would speed up economic recovery. This argument might have it exactly backward. Indeed, history shows that cutting spending in order to reduce deficits may be the key to promoting economic recovery.
In Europe today, the risk of a renewed recession comes not from the spending cuts that some governments have enacted, but from a sovereign debt overhang and multiple bank failures. July’s stress tests were not reassuring because they didn’t test the exposure of European banks to sovereign debt; had they done so, many banks would have failed. Those banks remain a threat to the European economy.
In the U.S., meanwhile, recent stimulus packages have proven that the “multiplier”—the effect on GDP per one dollar of increased government spending—is small. Stimulus spending also means that tax increases are coming in the future; such increases will further threaten economic growth.
We’ve noted here recently that Jon Stewart, host of The Daily Show on Comedy Central, has become increasingly skeptical of the Obama Administration and Democrats. Back in June, Stewart slammed the administration on civil liberties and abuse of executive power and the rhetoric surrounding energy independence. In July, he took the administration to task on transparency and Afghanistan. Last month, he had some fun with both parties on the rhetoric from both sides on the Ground Zero Mosque. And just a couple of days ago, he called Democrats out on ObamaCare in a conversation with DNC Chair Tim Kaine.
Stewart’s latest rant is directed at the administration and Democrats’ claims of a “Summer of Recovery,” saying, “‘Summer of Recovery’ is quickly sliding into the ‘Autumn of Nothing but Ramen Noodles for Dinner.” Here is the video:
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” - John Maynard Keynes
In case you haven’t heard, President Barack Obama replaced Christina Romer, who recently resigned her position as an economic advisor in the administration, with Austan Goolsbee, an economist from the University of Chicago.
Don’t expect him to recommend any big tax cuts. Goolsbee is extremely skeptical of supply-side tax arguments, calling the Laffer Curve a “fleeting figment of economic imagination.” Indeed, he may have influenced Obama himself, who in his 2008 book, “The Audacity of Hope,” says he doesn’t buy the theory that the Reagan tax cuts changed investment or labor incentives. He does, however, think it would not be a bad idea to lower corporate tax rates if there were also fewer credits and deductions.
Our friends at the Cato Institute has made Downsizing the Federal Government by Chris Edwards available for download for free. In the book, Edwards make the case for shrinking the size and scope of government by scaling back agencies and departments and propose eliminating or privatizing more than 100 federal programs to protect taxpayers.
It’s in PDF form below, or you can download it direct here.
In a farewell speech given yesterday, Christina Romer said that the United States averted a depression thanks to actions taken by the Obama Administration:
Christina Romer, the departing chairman of President Obama’s Council of Economic Advisers, is to say in a farewell speech today that the administration’s responses to the economic crisis it inherited averted “a second Great Depression” and kindled a slow recovery, according to excerpts released on Wednesday morning by the White House.
Ms. Romer’s last day as a member of Mr. Obama’s economic team, and its only leading woman, is Friday, which coincides with the release of unemployment figures for August that are expected to show joblessness still hovering above 9 percent. And she returns to California in a campaign season in which Republicans insist, and many voters believe, that administration policies have failed, despite nonpartisan analyses to the contrary.
“I am proud of the recovery actions we have taken. I believe they have made the difference between a second Great Depression and a slow but genuine recovery,” Ms. Romer will say, according to her speech draft. “And the passage of health care reform and financial regulatory reform are accomplishments that will be with us long after the recession is over.”
As the Wall Street Journal noted back in July, there is no way to know what would have happened without the bilions upon billions of “stimulus” dollars pumped into the economy, which haven’t done much other than drive up budget deficits:
As was predicted last year, Cash for Clunkers, the government sponsored program that gave consumers a credit for their trade in when they bought a new car, has distorted the used car market by driving up the price:
Car buyers on average paid $1,800 more for a used vehicle in July than they paid a year ago at this time, according to Edmunds.com data. That’s a 10.3 percent increase, bringing the average cost of a 3-year-old vehicle to $19,248. The price of a Cadillac Escalade spiked nearly 36 percent. “A lack of confidence in the economy is driving more people to used cars, putting upward pricing pressure on a limited supply of vehicles,” said Joe Spina, a senior analyst for Edmunds.
There’s a tricky aspect to this analysis, because last summer was marked by a used-car buying frenzy spawned by the Cash for Clunkers program. Spina said the effects of that program are hard to isolate precisely. “So many economic factors affect automobile sales and prices. It’s believed that the program delayed purchases prior to the program and also pulled sales forward while in place,” he said. “The program also eliminated inventory of older vehicles that were traded and then scrapped.” After the jump, take a look at the vehicles whose prices moved the most this July. The model years have been averaged. You can also get some advice on how to proceed in a (relatively) pricey used-car market.
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” - F.A. Hayek
Thomas Hoenig, Chairman of the Kansas City Federal Reserve, is cautioning his colleagues about the central bank’s use of monetary policy:
A lone dissenter on the Federal Reserve’s policy-making committee warned Friday that the central bank’s monetary strategy could backfire and touch off a new boom-and-bust cycle.
Thomas M. Hoenig, the president of the Federal Reserve Bank of Kansas City, dissented on Tuesday when the Federal Open Market Committee voted 9 to 1 to invest proceeds from the Fed’s mortgage-bond portfolio in longer-term Treasury debt. The decision was the Fed’s clearest signal yet that its confidence in the pace of the recovery was waning.
“Monetary policy is a useful tool, but it cannot solve every problem faced by the United States,” Mr. Hoenig told local Chamber of Commerce members in a speech at the University of Nebraska, Lincoln. “In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long.”
Mr. Hoenig added: “I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no shortcut.”
This debate has gone on for decades, but what a better way to explain it than the “Fear the Boom and Bust” video from EconStories:
Though it’s not the highest number on record, the deficit for the month of July was $165 billion, according to the Wall Street Journal:
Federal spending eclipsed revenue for the 22nd straight time, the Treasury Department said Wednesday. The $165.04 billion deficit, while a bit smaller than the $169.5 billion shortfall expected by economists polled by Dow Jones Newswires, was the second highest for the month on record. The highest was $180.68 billion in July 2009.
The government usually runs a deficit during July, which is the 10th month of the fiscal year. So far in fiscal 2010, the government spent $1.169 trillion more than it made. That figure is about $98 billion lower than during the comparable period a year earlier.
For all of fiscal 2009, the U.S. ran a record $1.42 trillion deficit. Fiscal 2010 might run a little higher—the Obama administration sees $1.47 trillion.
And there is no end in site:
Speculation broke that last night that Christina Romer, the White House chief economic advisor, plans to leave the Obama Administration:
Romer, an economics professor at the University of California (Berkeley) before taking the key admin post, did not respond to repeated calls to her office.
“She has been frustrated,” a source with insight into the WH economics team said. “She doesn’t feel that she has a direct line to the president. She would be giving different advice than Larry Summers [director of the National Economic Council], who does have a direct line to the president.”
“She is ostensibly the chief economic adviser, but she doesn’t seem to be playing that role,” the source said. The WH has been pounded for its faulty forecast that unemployment would not top 8% after its economic stimulus proposal passed.
Instead, the jobless rate is 9.5%, after exceeding 10% last year. It was “a horribly inaccurate forecast,” said Bert Ely, a banking consultant. “You have to wonder why Summers isn’t the one that should be taking the fall. But Larry is a pretty good bureaucratic infighter.”
Romer was one of the architects of President Barack Obama’s stimulus program, which was the first step in Democrats effectively taking ownership of the economy.
President Barack Obama and his economic advisors claimed that this spending would keep unemployment under 8% (pg. 5), claiming that it would rise to 9% without such action. As of today, the unemployment rate sits at 9.5%.