Our budget deficit is rising, along with government debt. Greece’s economy lay in tatters for having rampant budget deficits which led to incredible levels of government debt. And there are those that have found it fashionable to declare the United States is destined to turn out just like Greece. They say Obama’s economic plan in the first year of his presidency, which did add to the debt, was wrong headed. How true is all of this? Not nearly as true as many pundits would have you believe.
Let’s first looks at the obvious. The Greek economy is largely unnecessary in the eyes of the world’s investors, which makes it prime for a run. The United States is the strongest stilt in our delicately held aloft global economy. Could investors make a run at the US? Sure, but that works to their disadvantage in what could be cataclysmic ways.
Second, our debt to GDP ratio was at 83% in 2009, this is compared to a Greek debt to GDP ratio at 115% in 2009. Now this isn’t something to aspire to match, but we have a ways to go before we get to the same level.
Was Deficit Spending in 2009 Wrong Headed?
You know this is a delicate question with lots of different things to consider, but I think I have to go with HELL NO! Did all these pundits go through the new Texas social studies program? This is really basic economic stuff here. Back in the 1920s a guy named Hoover thought the markets could pull themselves out of the tailspin. He believed the invisible hand would pull the economy up by the bootstraps. The result: Great Depression.
We didn’t have another Great Depression and part of the reason is because Obama’s economic team said, rightly, in the short term to hell with budget deficits. When the private sector is crouched in survival position and unable or unwilling to restart the great engine of our economy, it is the responsibility of the government to try and get things restarted. Contrary to what you might have heard, you can’t just do with this tax credits. You gotta spend money to make money as the adage goes and that’s what the stimulus bill should have been. Unfortunately political will was about as weak as my will to not eat that second piece of cake.
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Back in the 1920s a guy named Hoover thought the markets could pull themselves out of the tailspin. He believed the invisible hand would pull the economy up by the bootstraps. The result: Great Depression.
This is just plain wrong. This notion that Hoover was some great practitioner of laissez-faire economic thought is sheer fantasy. Allow me to quote a writer from The New Republic:
http://www.tnr.com/article/politics/barack-obama-you-remind-me-herbert-hoover?page=0,0
Hoover was also not a conservative Republican like Calvin Coolidge, but a progressive who believed that capital and labor could work together with the encouragement of a beneficent government. In 1928, Hoover won the presidency in a landslide, and might have enjoyed success if the Great Depression had not intervened. Still, Hoover responded to the greatest economic crisis in the nation’s history. He funded what was then the largest peacetime public works expenditure. He signed a labor bill, the Norris-LaGuardia Act, that was the precursor of the Wagner Act. And he established the Reconstruction Finance Corporation to lend money to ailing banks. “The Hoover administration,” biographer Joan Hoff Wilson wrote, “became the first in American history to use the power of the federal government to intervene directly in the economy in time of peace.”
Let's look at wikipedia:
http://en.wikipedia.org/wiki/Herbert_Hoover#Policies
A self-described Progressive and Reformer, Hoover saw the presidency as a vehicle for improving the conditions of all Americans by regulation and by encouraging volunteerism. Long before entering politics, he had denounced laissez-faire thinking.[28] As Commerce Secretary, he had taken an active pro-regulation stance. As President, he helped push tariff and farm subsidy bills through Congress.
Indeed, wikipedia also notes that Hoover considered becoming a Democrat, but decided 1920 was going to be a GOP year.
Let's recall what none other than FDR said about Hoover:
http://en.wikipedia.org/wiki/Herbert_Hoover#Economy
Franklin D. Roosevelt blasted the Republican incumbent for spending and taxing too much, increasing national debt, raising tariffs and blocking trade, as well as placing millions on the dole of the government. Roosevelt attacked Hoover for "reckless and extravagant" spending, of thinking "that we ought to center control of everything in Washington as rapidly as possible," and of leading "the greatest spending administration in peacetime in all of history."[48] Roosevelt's running mate, John Nance Garner, accused the Republican of "leading the country down the path of socialism".
No wonder President Coolidge sarcastically labeled Hoover "Boy Wonder" and said "That man has offered me unsolicited advice for six years, all of it bad."
Lastly, while you argue that the deficit spending was necessary to prevent even further economic deterioration, you may want to consider the government's response to the 1921 recession/depression:
http://togetrichisglorious.blogspot.com/2009/07/1921-recession.html
We didn’t have another Great Depression and part of the reason is because Obama’s economic team said, rightly, in the short term to hell with budget deficits. When the private sector is crouched in survival position and unable or unwilling to restart the great engine of our economy, it is the responsibility of the government to try and get things restarted. Contrary to what you might have heard, you can’t just do with this tax credits. You gotta spend money to make money as the adage goes and that’s what the stimulus bill should have been.
Sorry, I also have to take issue with this. I don't understand the logic at work here at all. Let us remember that government doesn't create money out of thin air (unless it runs the printing presses in inflationary fashion). There is no huge bank vault piled high with gold like Scrooge McDuck it can start shoveling out of. For the government to spend money it must first remove money from the private sector, either through taxation or borrowing.
Why, then, is government spending preferable to private sector spending? Is government a more efficient allocator of capital? Such a claim defies credulity, given that government spending is more a product of political influence than a careful evaluation of where it can achieve the most good. Government is synonymous with waste and abuse. Does anyone really think Barney Frank or John Boehner a better allocator of capital than our country's businesses?
Government spending is an enemy of growth, not a proponent. This is true both on a macro level (the fact the Great Depression lasted for so many years should have been a stake through the heart of Keynesianism) or on a smaller-scale (see this: http://hbswk.hbs.edu/item/6420.html?wknews=052410).
Oh, and lastly -- I promise -- while you mention tax credits (which I think are horrible public policy), why is spending preferable to cuts in tax rates (which lets the private sector, rather than government, allocate capital to its most efficient end)?
Regarding short-term deficits:
The private sector wasn't spending money and banks weren't lending money. In that situation, the government should spend money to attempt to keep the economy afloat.
I do not say, nor would I defend that the government spending is preferable to private sector spending. Rather, when the private sector contracts and isn't spending, the government should intervene at times spending directly.
Also, I think there are a number of examples where some level of government involvement has led countries with otherwise limited growth prospects to achieve fast and we see sustained growth. I'll cite South Korea, Japan, and China as examples. Are there details around the edges? Yes. But these have seen monumental growth considering their state at the conclusion of WWII.
That "government is synonymous to waste" is good for a sound bite, and government is not the most efficient system or allocator of capital, but also not the anchor to economic growth you claim it to be.
Regarding short-term deficits:
The private sector wasn't spending money and banks weren't lending money. In that situation, the government should spend money to attempt to keep the economy afloat.
Yes, reduced lending and spending is what takes place in a recession, much of its necessary as the economy dispenses with unproductive activities and reallocates to more productive activities (I'll note, however, that money was available to those with good credit). But if government spending is necessary to keep the economy afloat, how does this square with Bill Clinton's mere $4 billion stimulus package in 1993, almost literally 1/200th that of Obama's, which was followed by an economic boom? How does one explain the recovery from the 1921 recession? Conversely, why did Hoover and FDR's spending fail to produce a sustained recovery from the Great Depression? What about the fact that the stimulus failed based on the benchmarks set by its own advocates?
http://michaelscomments.files.wordpress.com/2009/10/stimulus-vs-unemployment-september-dots.gif
The notion that government spending is needed to keep an economy afloat doesn't seem to square with observed facts or history.
I do not say, nor would I defend that the government spending is preferable to private sector spending. Rather, when the private sector contracts and isn't spending, the government should intervene at times spending directly.
This is implicit in your argument, as government spending is necessarily removed from the private sector beforehand, either by force (taxes) or voluntarily (borrowing). If I lend a dollar to the government, it is one less dollar I have to spend or invest. Thus, every dollar spent by the government is a dollar which cannot be allocated by the private sector.
If you cannot defend the notion that government spending is preferable to private spending then you should reconsider your argument, as it is heavily premised on this belief.
Also, I think there are a number of examples where some level of government involvement has led countries with otherwise limited growth prospects to achieve fast and we see sustained growth. I'll cite South Korea, Japan, and China as examples. Are there details around the edges? Yes. But these have seen monumental growth considering their state at the conclusion of WWII.
Interesting you would cite China, which saw its growth accelerate only after the government opted for a reduced role in the economy. I am also unsure why we should think either South Korea or Japan suffered from "otherwise limited growth prospects" absent government intervention. I can't speak to South Korea, but Japan has a disciplined and educated workforce, makes it a good candidate for growth (human capital being a huge determinant). It's also worth pointing out that Japan's best-performing industries have been those which were forged in the heat of the competitive market place rather than sheltered from competition by the government, as most of its economy is.
In any case, the fact that advocates for industrial policy have almost disappeared entirely -- with the possible exception of Laura D'Andrea Tyson -- indicates to me there the limited usefulness of those examples. I'll further note the outstanding performance of Hong Kong, which was a fishing village in the 1940s and opted for a more free market model (including a flat tax).
That "government is synonymous to waste" is good for a sound bite, and government is not the most efficient system or allocator of capital, but also not the anchor to economic growth you claim it to be.
Not just a sound bite. There is a wealth of literature which supports this line of thinking.
http://docs.google.com/viewer?a=v&q=cache:KmOR14dtwgEJ:hsgac.senate.gov/public/index.cfm%3FFuseAction%3DFiles.View%26FileStore_id%3D49224892-21c5-4052-b7ca-a0247877af5c+daniel+mitchell+government+spending+growth&hl=en&gl=us&pid=bl&srcid=ADGEESjjATD8GV_kR1TFPTsHaYJq8RedSqf8WJKp3MMc8OkY-9bSdITbQxKboLRe8P4kFkPJKrRRitbtvkNqb4b7ki_E_646q7yqOkH528QEsf4PnR7jEh5XQdqwN6JQExoasHAqhh0S&sig=AHIEtbSmnALwQN_49H7AYjpPeGQnz1kx0w
A Public Choice study reported: “[A]n increase in GTOT [total government spending] by 10 percentage points would decrease the growth rate of TFP [total factor productivity] by 0.92 percent [per annum]. A commensurate increase of GC [government consumption spending] would lower the TFP growth rate by 1.4 percent [per annum].”
• A National Bureau of Economic Research paper stated: “A reduction by one percentage point in the ratio of primary spending over GDP leads to an increase in investment by 0.16 percentage points of GDP on impact, and a cumulative increase by 0.50 after two years and 0.80 percentage points of GDP after five years. The effect is particularly strong when the spending cut falls on government wages: in response to a cut in the public wage bill by 1 percent of GDP, the figures above become 0.51, 1.83 and 2.77 per cent respectively.”
• A study from the Journal of Monetary Economics stated: “We also find a strong negative effect of the growth of government consumption as a fraction of GDP. The coefficient of –0.32 is highly significant and, taken literally, it implies that a one standard deviation increase in government growth reduces average GDP growth by 0.39 percentage points.”
• A National Bureau of Economic Research paper stated: “[A] 10 percent balanced budget increase in government spending and taxation is predicted to reduce output growth by 1.4 percentage points per annum, a number
comparable in magnitude to results from the one-sector theoretical models in King and Robello.”
• A Journal of Macroeconomics study discovered: “[T]he coefficient of the additive terms of the government-size variable indicates that a 1% increase in government size decreases the rate of economic growth by 0.143%.”
• A study in Public Choice reported: “[A] one per-cent increase in government spending as a per-cent of GDP (from, say, 30 to 31%) would raise the unemployment rate by approximately .36 of one percent (from, say, 8 to 8.36 percent).”
• A study in the European Economic Review reported: “The estimated effects of GEXP [government expenditure variable] are also some-what larger, implying that an increase in the expenditure ratio by 10 percent of GDP is associated with an annual growth rate that is 0.7–0.8 percentage points lower.”
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