The IMF Is the Doctor Kevorkian of Global Economic Policy

I don’t like giving international bureaucrats tax-free salaries. And it really galls me when they use their privileged positions to promote statism.

So you can understand why I’m not a big fan of the International Monetary Fund.

Dr. Kevorkian: “My assisted suicide campaign would have been much more efficient if I worked at the IMF”

Whether we’re talking more spending, more taxes, more bailouts, or more centralization and harmonization, it seems that the IMF is the Dr. Kevorkian of the global economy.

Or, since Doctor Kevorkian faded from the headlines more than 10 years ago, perhaps it would be better to say that the International Monetary Fund is the Doctor Gosnell of global economic policy.

But I don’t want to get into issues of assisted suicide or post-birth abortions, so let’s just say that the IMF has a very disturbing habit of recommending bad policy. Here are just a few of the items I’ve flagged over the past couple of years.

• Endorsing government cartels to boost tax and regulatory burdens.
• Trying to undermine flat tax systems in Albania and Latvia.
• Encouraging a “collective response” to over-spending in welfare states.
• Pushing for higher tax burdens in Greece.
• Seeking the same destructive policy in Cyprus.
• Advocating for more centralization and bureaucratic rule in Europe.
• Urging higher taxes in El Salvador.
• Supporting “eurobonds” so that taxpayers from other nations can subsidize the profligacy of welfare states such as Greece, Italy, and Spain.

But you need to give the bureaucrats credit for sticking to their guns.

We have more and more evidence with each passing day that Keynesian economics doesn’t work. President Bush imposed a so-called stimulus plan in 2008 and President Obama imposed an even  bigger “stimulus” in 2009. Based upon the economy’s performance over the past five-plus years, those plans didn’t work.

Japan has spent the past 20-plus years imposing one Keynesian scheme after another, and the net effect is economic stagnation and record debt. Going back further in time, Presidents Hoover and Roosevelt dramatically increased the burden of government spending, mostly financed with borrowing, and a recession became a Great Depression.

That’s not exactly a successful track record

Yet the IMF is undaunted. The bureaucrats are pushing Keynesian snake oil and bigger government all across Europe.

Here are some details from a Wall Street Journal report. about the IMF’s promotion of assisted suicide in Central Europe.

The International Monetary Fund is recommending short-term stimulus for much of Central Europe, where economies are going through their roughest patch in years and the recession in the euro zone has dampened hopes for a quick recovery. …Increased government spending to stimulate economic activity and create jobs is therefore warranted, he said. “Short-term economic policies should be geared toward supporting the economy and not creating an additional drag.” …Amid spending cuts, the countries’ fortunes reversed recently.  …the Czech Republic should ease up on fiscal austerity and embark on pro-growth spending, the leader of the IMF’s Czech mission said. …The IMF also has been encouraging looser monetary policy in both Poland and the Czech Republic.

Gee, not just more Keynesianism, but easy money as well!

The IMF also is pushing bad policy on the Brits (though I’m not sure why they’re bothering since the statist government of David Cameron hardly needs any help in that regard).

Here are some details from the EU Observer.

The UK should delay plans to push through further austerity measures worth £10 billion (€12 billion), the International Monetary Fund (IMF) warned on Wednesday. …The extra cuts would “pose headwinds to growth…..at a time when resources in the economy are under-utilised,” said the Washington-based institution. Instead, the IMF urged London to bring forward plans to invest in infrastructure projects… The government “could undertake a reform of property taxes and consider broadening the VAT base” to pay for the measures.

What’s remarkable is that the IMF isn’t even intellectually honest about its Keynesian proclivities. They’re happy to advocate for more spending, but honest Keynesians also should be against tax hikes. Yet the bureaucrats proposed a couple of tax hikes to “pay for the measures.”

In other words, the IMF agenda is bigger government – with more taxes and more spending.

Which raises the question of why all of us are paying for a bloated bureaucracy that simply tells politicians to implement bad policies? Particularly since politicians have demonstrated over and over again that they’re immensely qualified at concocting their own bad policies?

P.S. To be fair, I should admit that there are rare bits of sanity from the economists at the IMF. They’ve acknowledged, for instance, that the Laffer Curve is real and warned that it makes no sense to push taxes too high. And some of the bureaucrats have even admitted that it sometimes makes sense to reduce the burden of government spending. And even though it wasn’t their intention, IMF bureaucrats provided very strong evidence showing why the value-added tax is a destructive money machine for big government.

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Another Example of Editorial-Page Fiction at the New York Times

Are there any fact checkers at the New York Times?

Since they’ve allowed some glaring mistakes by Paul Krugman (see here and here), I guess the answer is no.

But some mistakes are worse than others.

Consider a recent column by David Stuckler of Oxford and Sanjay Basu of Stanford. Entitled “How Austerity Kills,” it argues that budget cuts are causing needless deaths.

Here’s an excerpt that caught my eye.

Countries that slashed health and social protection budgets, like Greece, Italy and Spain, have seen starkly worse health outcomes than nations like Germany, Iceland and Sweden, which maintained their social safety nets and opted for stimulus over austerity.

The reason this grabbed my attention is that it was only 10 days ago that I posted some data from Professor Gurdgiev in Ireland showing that Sweden and Germany were among the tiny group of European nations that actually had reduced the burden of government spending.

Greece, Italy, and Spain, by contrast, are among those that increased the size of the public sector. So the argument presented in the New York Times is completely wrong. Indeed, it’s 100 percent wrong because Iceland (which Professor Gurdgiev didn’t measure since it’s not in the European Union) also has smaller government today than it did in the pre-crisis period.

But that’s just part of the problem with the Stuckler-Basu column. They want us to believe that “slashed” budgets and inadequate spending have caused “worse health outcomes” in nations such as Greece, Italy, and Spain, particularly when compared to Germany, Iceland, and Spain.

But if government spending is the key to good health, how do they explain away this OECD data, which shows that government is actually bigger in the three supposed “austerity” nations than it is in the three so-called “stimulus” countries.

Once again, Stuckler and Basu got caught with their pants down, making an argument that is contrary to easily retrievable facts.

But I guess this is business-as-usual at the New York Times. After all, this is the newspaper that’s been caught over and over again engaging in sloppy and/or inaccurate journalism.

• Asserting that government schools are “starved of funding” when taxpayer subsidies actually have skyrocketed.
• Accidentally confirming that tax competition is needed to control the greed of the political class.
• Writing that the sequester will mean “deep automatic spending cuts” when the budget actually will climb by $2.4 trillion.
• Claiming that Italy is more prosperous than the United States and that there is less poverty.
• Urging a tax-increase budget agreement based on a chart showing that the only successful budget deal was the one that cut taxes.

Oh, and if you want to know why the Stuckler-Basu column is wrong about whether smaller government causes higher death rates, just click here.

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Following in Geithner’s Footsteps, Treasury Secretary Lew Urges Bad Fiscal Policy in other Nations

Political insiders remember Tim Geithner for his role in promoting the bailout culture and crony capitalism in Washington.

Comedians remember him for the laughable hypocrisy of urging higher taxes for others while cheating on his own tax return.

But I mostly think of him as being the Forrest Gump of international economics.

This was the guy, after all, who unintentionally caused Chinese students to burst out laughing in 2009 when he claimed the Obama Administration supported a strong dollar.

And Europeans told him to get lost when he tried to lecture them on fiscal policy in 2011. But don’t think they were being rude. They already had to endure his bad advice earlier that year and back in 2010 as well.

Well, Geithner’s successor apparently is equally oblivious. He’s badgering the Germans to adopt Keynesian policies to “stimulate” growth, even though the Germans are doing better than most other European nations – in part because they are one of the few nations that have reduced the burden of government spending in recent years!

Here are some blurbs from the EU Observer on Treasury Secretary Lew’s attempt to export bad ideas.

US treasury secretary Jack Lew will repeat calls for Germany to stimulate demand in order to drag the eurozone out of recession, according to US government sources. …The US stance is likely to meet resistance from the German government, which is reluctant to increase wages and stimulate domestic spending, preferring instead to keep wages low to encourage manufacturing and exports. But Berlin is under pressure to reduce its 7 percent export surplus. In April, Lew used his first trip to Berlin as Treasury Secretary to urge counterpart Wolfgang Schaueble to put in place measures to stimulate consumer spending. For his part, Schaueble commented that neither the US or Germany should try to give “lessons” or “grades” to each other.

I’m actually in favor of giving “lessons” and “grades” to governments, but not if it’s a case of the blind leading the blind.

This is not to say that Germany has good fiscal policy. Indeed, the best that can be said about the Merkel government is that it hasn’t moved Germany much further in the wrong direction in recent years.

The Obama Administration, by contrast, is moving the United States in the wrong direction at faster pace, so the last thing the Germans need is advice from Treasury Secretary Lew or anyone else associated with the White House.

P.S. If you want some unintentional humor, the Washington Post referred to Germany as being “fiscally conservative.”

P.P.S. As you can see here and here, there’s little reason to be optimistic about the intellectual climate in Germany.

P.P.P.S. But at least we have some amusing videos involving Germany, as you can see here, here, and here.

P.P.P.P.S. Geithner also should be remembered for pushing through an IRS regulation that forces American banks to put foreign tax law above U.S. tax law.

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Where Are the European Spending Cuts?

Paul Krugman recently tried to declare victory for Keynesian economics over so-called austerity, but all he really accomplished was to show that tax-financed government spending is bad for prosperity.

More specifically, he presented a decent case against the European-IMF version of “austerity,” which has produced big tax increases.

But what happens if nations adopt the libertarian approach, which means “austerity” is imposed on the government, rather than on taxpayers?

In the past, Krugman’s also has tried to argue that European nations have erred by cutting spending, but this has led to some embarrassing mistakes.

• He asserted that “British growth has stalled” because of “spending cuts,” but he overlooked the elementary fact that government spending in the U.K. was growing twice as fast as inflation.
• And in the case of Estonia, where there actually were genuine spending cuts, he wanted people to somehow think that those cuts in 2009 were responsible for an economic downturn that occurred in 2008.

Now we have some additional evidence about the absence of spending austerity in Europe. A leading public finance economist from Ireland, Constantin Gurdgiev, reviewed the IMF data and had a hard time finding any spending cuts.

…in celebration of that great [May 1] socialist holiday, “In Spain, Portugal, Greece, Italy and France tens of thousands of people took to the streets to demand jobs and an end to years of belt-tightening”. Except, no one really asked them what did the mean by ‘belt-tightening’. …let’s check out expenditure side of Europe’s ‘savage austerity’ story… The picture hardly shows much of any ‘savage cuts’ anywhere in sight.

As seen in his chart, Constantin compared government spending burdens in 2012 to the average for the pre-recession period, thus allowing an accurate assessment of what’s happened to the size of the public sector over a multi-year period.

Here are some of his conclusions from reviewing the data.

Of the three countries that experienced reductions in Government spending as % of GDP compared to the pre-crisis period, Germany posted a decline of 1.26 percentage points (from 46.261% of GDP average for 2003-2007 period to 45.005% for 2012), Malta posted a reduction of just 0.349 ppt and Sweden posted a reduction of 1.37 ppt.

No peripheral country – where protests are the loudest – or France et al have posted a reduction. In France, Government spending rose 3.44 ppt on pre-crisis level as % of GDP, in Greece by 4.76 ppt, in Ireland by 7.74 ppt, in Italy by 2.773 ppt, in Portugal by 0.562 ppt, and in Spain by 8.0 ppt.

Average Government spending in the sample in the pre-crisis period run at 44.36% of GDP and in 2012 this number was 48.05% of GDP. In other words: it went up, not down.

…All in, there is no ‘savage austerity’ in spending levels or as % of GDP.

I’ll add a few additional observations.

Sweden and Germany are among the three nations that have reduced the burden of government spending as a share of GDP, and both of those nations are doing better than their European neighbors.

Switzerland isn’t an EU nation, so it’s not included in Constantin’s chart, but government spending as a share of economic output also has been reduced in that nation over the same period, and the Swiss economy also is doing comparatively well.

The moral of the story is that reducing the burden of government spending is the right recipe for sustainable and strong growth. Growth also is far more likely if lawmakers refrain from class-warfare tax policy and instead seek to collect revenue in ways that minimize the damage to prosperity.

Unfortunately, that’s not happening in Europe…and it’s not happening in the United States.

A few countries are moving in the right direction, such as Canada, but with still a long way to travel.

The best role models are still Hong Kong and Singapore, and it’s no coincidence that those two jurisdictions regularly dominate the top two spots in the Economic Freedom of the World rankings.

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Krugton the Invincible…or Krugman the Inadvertent Opponent of Tax Increases?

President Bush imposed a so-called stimulus plan in 2008 and President Obama imposed an even  bigger “stimulus” in 2009. Based upon the economy’s performance over the past five-plus years, those plans didn’t work.

Japan has spent the past 20-plus years imposing one Keynesian scheme after another, and the net effect is economic stagnation and record debt.

Going back further in time, Presidents Hoover and Roosevelt dramatically increased the burden of government spending, mostly financed with borrowing, and a recession became a Great Depression.

That’s not exactly a successful track record, but Paul Krugman thinks the evidence is on his side and that it’s time to declare victory for Keynesian economics.

Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.

“Victory for us Keynesians. Now we get the cheerleaders!”

But Krugman doesn’t just want to declare victory. He also spikes the football and does a dance in the end zone.

I’m always right while the people who disagree with me are always wrong. And not just wrong, they’re often knaves or fools. …look at the results: again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above. I’m Krugtron the Invincible!

So why does Krugman feel so confident about his position, notwithstanding the evidence? Veronique de Rugy has a concise and fair assessment of the Keynesian rationale. Simply stated, no matter how bad the results, the Keynesians think the economy would have been in even worse shape in the absence of supposed stimulus.

…the country’s economic performance of the last four or five years can hardly be described has a rousing success for Keynesian economics, at least as implemented by the administration. In fact, measured by the unemployment rate, it hasn’t been a success by the administration’s own standards. To that, Krugman says that the stimulus implemented by the administration wasn’t big enough and, as such, that Keynesian economics hasn’t been tried yet.

Veronique, by the way, points out why this argument is utterly unpersuasive by using the same logic to declare victory for markets.

But by this logic, free-market economics is doing pretty well, too: I think we can all agree that free-market economics wasn’t tried. The economy hasn’t really recovered properly. This must mean free-market economics has won.

But I think the best part of Veronique’s article is the section explaining that not all austerity is created equal. Simply stated, why expect better economic performance if “austerity” means that taxes go up and the burden of government spending stays the same?

Here’s some of what Veronique wrote on this issue.

…austerity, as defined by economists, represents the measures implemented by a government in order to reduce the debt-to-GDP ratio. Unlike Keynesians, I do not think that debt is good for economic growth, but I would prefer the word “austerity” to describe the measures implemented to shrink the size and scope of government… In other words, the important question about austerity has less to do with the size of the austerity package than what type of austerity measures are implemented. …when governments try to reduce the debt by raising taxes, it is likely to result in deep and pronounced recessions, possibly making the fiscal adjustment counterproductive. …austerity measures implemented in Europe are not the kind of austerity we actually need. In fact, the data shows that it has mostly consisted in raising taxes.

Since I’ve repeatedly made these same points, you can understand why I’m a big fan of her analysis.

Moreover, I think this gives us some insight into why Krugman may actually think he has prevailed. Simply stated, he’s comparing Keynesianism to the IMF/European version of austerity.

But that type of “austerity” – as you can see from one of Veronique’s charts – is overwhelmingly comprised of tax hikes.

Yet is anybody surprised that we haven’t seen much – if any – growth in tax-happy nations such as Greece, Portugal, Italy, Ireland, Spain, and the United Kingdom?

What we really need are examples of nations that have reduced the burden of government spending. Then we can compare those results with nations that have tried Keynesianism and nations that have tried tax increases.

Sadly, we only have a few examples of this smaller-government approach. But we get very positive results.

The burden of government spending was reduced during the Reagan years and Clinton years, for instance, and the economy enjoyed good growth in both periods.

Canada was even more aggressive about reducing the size of the state during the 1990s. Their economy also did quite well, notwithstanding Keynesian dogma.

I suspect Keynesians would respond to these examples by asserting it’s okay – at least in theory – to restrain spending if the economy isn’t in recession.*

But then how do they respond to the experience of the Baltic nations? When the financial crisis hit a few years ago, those governments imposed genuine spending cuts and largely avoided the big tax hikes that have plagued other European nations.

Now Estonia, Lithuania, and Latvia are enjoying impressive growth while the nations that raised taxes seem stuck in perpetual recession.**

So let’s recap. When nations try Keynesianism, they get bad result because more government spending isn’t conducive to growth.

When nations raise taxes, they get bad results because you don’t get more growth by penalizing work, saving, investment, and entrepreneurship.

But when nations reduce the burden of government spending and leave more resources in the productive sector, the economy recovers.

Seems like one side can declare victory and spike the football, but it’s not Paul Krugman and the Keynesians.

*I’m guessing one would be hard pressed to find any examples of modern-day Keynesians ever supporting fiscal restraint.

**Krugman tried to undermine the Baltic model of fiscal restraint by attacking Estonia, but wound up with egg on his face.

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Debunking Krugman’s European Austerity Narrative

Statists are in a tough position. For years, they’ve been saying the United States should be more like Europe.

And, as shown in these very funny cartoons by Michael Ramirez and Bob Gorrell, President Obama is a cheerleader for that effort.

But now Europe’s welfare states are collapsing, so the left is scrambling to come up with some way of rationalizing their support for ever-growing levels of taxation and spending

Paul Krugman’s been doing what he can to square this circle, complaining that Europe is in trouble because governments aren’t spending enough. Sounds preposterous, but at least he provides some comfort for the don’t-confuse-us-with-the-facts-we’re-Keynesians crowd.

But for those who prefer to look at real data, one of my Cato Institute colleagues has sorted through the numbers to see whether Krugman’s hypothesis has any validity. Here’s some of what Alan Reynolds wrote for Investor’s Business Daily, reprinted by Real Clear Politics, starting with a quick look at some nations that experienced growth during periods when the burden of government spending was falling.

In Iceland, which didn’t throw taxpayer money at the banks, government spending was slashed from 57.6% of GDP in 2008 to 46.5% in 2012. The deficit fell from 12.9% of GDP to 3.4%. The economy began to recover in 2011. Iceland’s economic boost from fiscal frugality was neither unorthodox nor unique. After all, the U.S. economy boomed in the late 1990s when federal spending was cut from 22.3% of GDP in 1991 to 18.2% in 2000. In Canada, total federal and provincial spending was deeply slashed from 53.2% of GDP in 1992 to 39.2% in 2007 with only salubrious effects.

But what about Krugman’s argument that spending cuts have hurt growth in nations such as Portugal, Ireland, Italy, Greece, Great Britain, and Spain?

Well, Alan points out that these nations haven’t reduced spending.

The PIIGGS imposed no austerity at all on the public sector in the past five years. Government spending on bailouts, subsidies, grants, salaries and entitlements commands a much larger share of these economies than it did just a few years ago.

If you break down the data on an annual basis, some of these nations have been forced by the financial crisis to finally reduce their budgets, but the cuts in the past year or two aren’t nearly enough to make up for the huge spending increases in earlier years.

But these governments have shown no reluctance to raises taxes. I’ve already discussed their unfortunate propensity to hike value-added tax rates. Alan explains that they’re doing the same thing for income tax rates.

European austerity has been focused on the private sector — namely, taxpayers with high incomes. That is the second thing the PIIGGS have in common. The highest income tax rate was recently increased in every one of the troubled PIIGGS except Italy (where it was already too high at 43%). The top tax rate was hiked from 40 to 46.5% in Portugal, from 41 to 48% in Ireland, from 40 to 45% in Greece, from 40 to 50% in Great Britain, and from 48 to 52% in Spain.

In other words, Veronique de Rugy is correct. The “austerity” in Europe generally has been in the form of higher taxes, squeezing the productive sector to prop up the public sector.

Though I would point out that there are a few bright spots. Switzerland has been doing quite well, thanks to a “debt brake” that limits how much the budget can grow each year.

And the Baltic nations deserve credit for imposing genuine budget cuts several years ago, a policy that has yielded big dividends since they’re now growing while most other European nations are mired in economic stagnation.

And they kept their flat tax systems, showing some appreciation for the common-sense insight that you don’t get more growth by punishing investors, entrepreneurs, and small business owners.

By the way, Alan’s column isn’t completely depressing. He writes that the burden of government spending is reasonable (at least compared to Europe’s bankrupt welfare states) in some of the major emerging economies.

And they’ve focused more on lowering tax rates rather than making them more punitive.

It is enlightening to compare the depressing performance of these tax-and-spend countries to the rapidly-expanding BRIC (Brazil, Russia, India and China) and MIST economies (Mexico, Indonesia, South Korea and Turkey). Government spending is frugal in these countries, averaging 32.1% of GDP in the BRICs and 27.4% for the MIST group. Rather than raising top tax rates, all but one of the BRIC and MIST countries slashed their highest individual income tax rates in half; sometimes lower. Brazil cut the top tax rate from 55 to 27.5%. Russia replaced income tax rates up to 60% with a 13% flat tax. India cut the top tax rate to 30% from 60%. Similarly, the top tax rate was cut from 55 to 30% in Mexico, from 50 to 30% in Indonesia, from 89 to 38% in South Korea, and from 75 to 35% in Turkey. In China, statutory income tax rates can still reach 45% on paper, but that is only for high salaries and is widely evaded. Investment income is subject to a flat tax of 20%, the corporate tax is 15-25%, and China’s extremely low payroll tax adds almost nothing to labor costs.

This doesn’t mean the BRIC and MIST nations deserve high praise. Many of them still get poor scores from Economic Freedom of the World, largely because the regulatory burden is excessive and also because more needs to be done to uphold the rule of law and protect property rights.

But at least most of them aren’t compounding those mistakes with Keynesian spending schemes and class-warfare tax policy.

For more information about nations that have benefited from spending restraint, here’s my video looking at Ireland in the 1980s, New Zealand and Canada in the 1990s, and Slovakia last decade.

The moral of the story, needless to say, is that good things happen when governments comply with Mitchell’s Golden Rule.

P.S. Paul Krugman received some much-deserved abuse when he made false attacks on Estonia’s admirable fiscal policy.

P.P.S. For some humor about the European fiscal mess, here are some laughable quotes from European leaders. This Robert Ariail cartoon also gets a laugh, as do these videos on a Greek view of Germans and a romantic conflict between Northern Europe and Southern Europe. My favorite, for what it’s worth, is this map showing how Greeks view the rest of Europe, with this Dave Barry column a close runner-up.

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An Inside Look at Left-Wing Social Science Gun Research

In a presumably futile effort to change their minds by learning how they think, I periodically try to figure out the left-wing mind.

Why, for instance, do some people believe in Keynesian economics, when it is premised on the fanciful notion that you can increase “spending power” by taking money out of the economy’s left pocket and putting it in the economy’s right pocket?

I actually think part of the problem is that folks on the left focus on how income is spent rather than how it’s earned, so I sometimes try to get them to understand that economic growth occurs when we produce more rather than consume more. My hope is that they’ll better understand how the economy works if they look at the issue from this perspective.

But I’m getting off track. I don’t want to get too serious because the purpose of this post is to share this satirical look at the how leftists rationalize their anti-gun biases.

Let’s take a look at two cities that are quite similar in terms of demographics and income. But they have very different murder rates. Your job is to pretend you’re a leftist and come up with an explanation.

To be fair, we can’t rule out cold weather as a possible explanation given this limited set of data.

For what it’s worth, however, scholars who actually do real research, like David Kopel and John Lott, reach different conclusions.

Returning to satire, the Houston-Chicago comparison reminds me of this IQ test for criminals and liberals.

And since we’re having some fun with our liberal friends, let’s close with this comparison of liberals, conservatives, and Texans.

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Challenge for Keynesian Anti-Sequester Hysterics: Why Did America’s Economy Boom When Reagan and Clinton Reduced the Burden of Spending?

Triggered by an appearance on Canadian TV, I asked yesterday why we should believe anti-sequester Keynesians. They want us to think that a very modest reduction in the growth of government spending will hurt the economy, yet Canada enjoyed rapid growth in the mid-1990s during a period of substantial budget restraint.

I make a similar point in this debate with Robert Reich, noting that  the burden of government spending was reduced as a share of economic output during the relatively prosperous Reagan years and Clinton years.

Being a magnanimous person, I even told Robert he should take credit for the Clinton years since he was in the cabinet as Labor Secretary. Amazingly, he didn’t take me up on my offer.

Anyhow, these two charts show the stark contrast between the fiscal policy of Reagan and Clinton compared to Bush..

And there’s lots of additional information comparing the fiscal performance of various presidents here, here, and here.

For more information on Reagan and Clinton, this video has the details.

Which brings us back to the original issue.

The Keynesians fear that a modest reduction in the growth of government (under the sequester, the federal government will grow $2.4 trillion over the next 10 years rather than $2.5 trillion) will somehow hurt the economy.

But government spending grew much slower under Reagan and Clinton than it has during the Bush-Obama years, yet I don’t think anybody would claim the economy in recent years has been more robust than it was in the 1980s and 1990s.

And if somebody does make that claim, just show them this remarkable chart (if they want to laugh, this Michael Ramirez cartoon makes the same point).

So perhaps the only logical conclusion to reach is that government is too big and that Keynesian economics is wrong.

I don’t think I’ll ever convince Robert Reich, but hopefully the rest of the world can be persuaded by real-world evidence.

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Challenge for Keynesian Anti-Sequester Hysterics: Why Did Canada’s Economy Boom When the Burden of Spending Was Sharply Reduced?

In this appearance on Canadian TV, I  debunk anti-sequester hysteria, pointing out that “automatic budget cuts” merely restrain government so that it grows $2.4 trillion over the next 10 years rather than $2.5 trillion.

I also point out that we shouldn’t worry about government employees getting a slight haircut since federal bureaucrats are overcompensated. Moreover, I warn that some agencies may deliberately try to inconvenience people in an attempt to extort more tax revenue.

But I think the most important point in the interview was the discussion of what happened in Canada in the 1990s.

This example is important because the Obama White House is making the Keynesian argument that a smaller burden of government spending somehow will translate into less growth and fewer jobs.

Nobody should believe them, of course, since they used this same discredited theory to justify the so-called stimulus and all their predictions were wildly wrong.

But the failed 2009 stimulus showed the bad things that happen when government spending rises. Maybe the big spenders want us to think the relationship doesn’t hold when government gets put on a diet?

Well, here’s some data from the International Monetary Fund showing that the Canadian economy enjoyed very strong growth when policymakers imposed a near-freeze on government outlays between 1992 and 1997.

For more information on this remarkable period of fiscal restraint, as well as evidence of what happened in other nations that curtailed government spending, here’s a video with lots of additional information.

By the way, we also have a more recent example of successful budget reductions. Estonia and the other Baltic nations ignored Keynesian snake-oil when the financial crisis hit and instead imposed genuine spending cuts.

The result? Growth has recovered and these nations are doing much better than the European countries that decided that big tax hikes and/or Keynesian spending binges were the right approach.

Paul Krugman, not surprisingly, got this wrong.

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Defending Cato from the Predictably Inaccurate Ramblings of Paul Krugman

Writing for the New York Times, Paul Krugman has a new column promoting more government spending and additional government regulation. That’s a dog-bites-man revelation and hardly noteworthy, of course, but in this case he takes a swipe at the Cato Institute.

The financial crisis of 2008 and its painful aftermath…were a huge slap in the face for free-market fundamentalists. …analysts at right-wing think tanks like…the Cato Institute…insisted that deregulated financial markets were doing just fine, and dismissed warnings about a housing bubble as liberal whining. Then the nonexistent bubble burst, and the financial system proved dangerously fragile; only huge government bailouts prevented a total collapse.

Upon reading this, my first reaction was a perverse form of admiration. After all, Krugman explicitly advocated for a housing bubble back in 2002, so it takes a lot of chutzpah to attack other people for the consequences of that bubble.

He likes cats, so he’s not all bad

But let’s set that aside and examine the accusation that folks at Cato had a Pollyanna view of monetary and regulatory policy. In other words, did Cato think that “deregulated markets were doing just fine”?

Hardly. If Krugman had bothered to spend even five minutes perusing the Cato website, he would have found hundreds of items by scholars such as Steve Hanke, Gerald O’Driscoll, Bert Ely, and others about misguided government regulatory and monetary policy. He could have perused the remarks of speakers at Cato’s annual monetary conferences. He could have looked at issues of the Cato Journal. Or our biennial Handbooks on Policy.

The tiniest bit of due diligence would have revealed that Cato was not a fan of Federal Reserve policy and we did not think that financial markets were deregulated. Indeed, Cato scholars last decade were relentlessly critical of monetary policy, Fannie Mae, Freddie Mac, Community Reinvestment Act, and other forms of government intervention.

Heck, I imagine that Krugman would have accused Cato of relentless and foolish pessimism had he reviewed our work  in 2006 or 2007.

I will confess that Cato people didn’t predict when the bubble would peak and when it would burst. If we had that type of knowledge, we’d all be billionaires. But since Krugman is still generating income by writing columns and doing appearances, I think it’s safe to assume that he didn’t have any special ability to time the market either.

Krugman also implies that Cato is guilty of historical revisionism.

…many on the right have chosen to rewrite history. Back then, they thought things were great, and their only complaint was that the government was getting in the way of even more mortgage lending; now they claim that government policies, somehow dictated by liberals even though the G.O.P. controlled both Congress and the White House, were promoting excessive borrowing and causing all the problems.

I’ve already pointed out that Cato was critical of government intervention before and during the bubble, so we obviously did not want government tilting the playing field in favor of home mortgages.

It’s also worth nothing that Cato has been dogmatically in favor of tax reform that would eliminate preferences for owner-occupied housing. That was our position 20 years ago. That was our position 10 years ago. And it’s our position today.

I also can’t help but comment on Krugman’s assertion that GOP control of government last decade somehow was inconsistent with statist government policy. One obvious example would be the 2004 Bush Administration regulations that dramatically boosted the affordable lending requirements for Fannie Mae and Freddie Mac, which surely played a role in driving the orgy of subprime lending.

And that’s just the tip of the iceberg. The burden of government spending almost doubled during the Bush years, the federal government accumulated more power, and the regulatory state expanded. No wonder economic freedom contracted under Bush after expanding under Clinton.

But I’m digressing. Let’s return to Krugman’s screed. He doesn’t single out Cato, but presumably he has us in mind when he criticizes those who reject Keynesian stimulus theory.

…right-wing economic analysts insisted that deficit spending would destroy jobs, because government borrowing would divert funds that would otherwise have gone into business investment, and also insisted that this borrowing would send interest rates soaring. The right thing, they claimed, was to balance the budget, even in a depressed economy.

Actually, I hope he’s not thinking about us. We argue for a smaller burden of government spending, not a balanced budget. And we haven’t made any assertions about higher interest rates. We instead point out that excessive government spending undermines growth by undermining incentives for productive behavior and misallocating labor and capital.

But we are critics of Keynesianism for reasons I explain in this video. And if you look at current economic performance, it’s certainly difficult to make the argument that Obama’s so-called stimulus was a success.

But Krugman will argue that the government should have squandered even more money. Heck, he even asserted that the 9-11 attacks were a form of stimulus and has argued that it would be pro-growth if we faced the threat of an alien invasion.

In closing, I will agree with Krugman that there’s too much “zombie” economics in Washington. But I’ll let readers decide who’s guilty of mindlessly staggering in the wrong direction.

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Why GDP Data Shouldn’t Be Interpreted in Ways that Support Keynesian Spending

Fighting against statism in Washington is a lot like trying to swim upstream. It seems that everything (how to measure spending cuts, how to estimate tax revenue, etc) is rigged to make your job harder.

A timely example is the way the way government puts together data on economic output and the way the media reports these numbers.

Just yesterday, for instance, the government released preliminary numbers for 4th quarter gross domestic product (GDP). The numbers were rather dismal, but that’s not the point.

I’m more concerned with the supposed reason why the numbers were bad. According to Politico, “the fall was largely due to a drop in government spending.” Bloomberg specifically cited a “plunge in defense spending” and the Associated Press warned that “sharp government spending cuts” are the economy’s biggest threat in 2013.

To the uninitiated, I imagine that they read these articles and decide that Paul Krugman is right and that we should have more government spending to boost the economy.

But here’s the problem. GDP numbers only measure how we spend or allocate our national income. It’s a very convoluted indirect way of measuring economic health. Sort of like assessing the status of your household finances by adding together how much you spend on everything from mortgage and groceries to your cable bill and your tab at the local pub.

Wouldn’t it make much more sense to directly measure income? Isn’t the amount of money going into our bank accounts the key variable?

The same principle is true – or should be true – for a country.

That’s why the better variable is gross domestic income (GDI). It measures things such as employee compensation, corporate profits, and small business income.

These numbers are much better gauges of national prosperity, as explained in this Economics 101 video from the Center for Freedom and Prosperity.

The video is more than two years old and it focuses mostly on the misguided notion that consumer spending drives growth, but you’ll see that the analysis also debunks the Keynesian notion that government spending boosts an economy (and if you want more information on Keynesianism, here’s another video you may enjoy).

The main thing to understand is that GDP numbers and the press coverage of that data is silly and misleading. We should be focusing on how to increase national income, not what share of it is being redistributed by politicians.

But that logical approach is not easy when the Congressional Budget Office also is fixated on the Keynesian approach.

Just another example of how the game in Washington is designed to rationalize and enable a bigger burden of government spending.

Addendum: I’m getting ripped by critics for implying that GDP is Keynesian. I think part of the problem is that I originally entitled this post “Making Sense of Keynesian-Laced GDP Reports.” Since GDP data is simply a measure of how national output is allocated, the numbers obviously aren’t “laced” one way of the other. So the new title isn’t as pithy, but it’s more accurate and I hope it will help focus attention on my real point about the importance of figuring out the policies that will lead to more output.

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Don’t Trust Economists, Part II

Back in 2010, I shared a remarkable graph comparing the predictions of economists to what actually happened.

Not surprisingly, the two lines don’t exactly overlap, which explains the old joke that economists have correctly predicted nine of the last five recessions.

It’s not that economists are totally useless. It’s just that they don’t do a very good job when they venture into the filed of macroeconomics, as Russ Roberts succinctly explained. And they look especially foolish when they try to engage in forecasting.

But at least economists sometimes can be entertaining, though usually in the laughing-at-you rather than laughing-with-you way.

Consider, for instance, the escapades of one of Portugal’s leading economic analysts. Here’s some of what the UK-based Guardian recently reported.

As an ex-presidential consultant, a former adviser to the World Bank, a financial researcher for the United Nations and a professor in the US, Artur Baptista da Silva’s outspoken attacks on Portugal’s austerity cuts made the bespectacled 61-year-old one of the country’s leading media pundits last year.  …Mr Baptista da Silva…claimed to be a social economics professor at Milton College – a private university in Wisconsin, US…and to be masterminding a UN research project into the effects of the recession on southern European countries.

Promoting more government spending

Mr. da Silva was sort of the Paul Krugman of Portugal, working with the left and urging Keynesian policy.

Blessed with such an impressive CV, Mr Baptista’s subsequent criticisms of the Lisbon government’s far-reaching austerity cuts, as well as dire warnings that the UN planned to take action against it, struck a deep chord with its financially beleaguered population. According to the Spanish newspaper El País, his powerfully delivered comments at a debate at the International Club, a prestigious Lisbon cultural and social organisation last month, were greeted with thunderous applause and a part-standing ovation. Then, in a double page interview in the weekly newspaper Expresso in mid-December, Mr Baptista da Silva continued to denounce the government’s policies. That was followed by an interview for the radio station TSF, appearances in high-profile television debates and well-publicised meetings with trade union leaders to advise them on economic policies.

But it turns out that there was a tiny problem with Mr. da Silva’s resume. At least if “tiny” is the right way to describe a total fraud.

The only problem was that Mr Baptista da Silva is none of the above. He turned out to be a convicted forger with fake credentials and, following his spectacular hoodwinking of Portuguese society, he could soon face fraud charges. …in the country’s jails, Mr Baptista da Silva’s sudden appearance among the intellectual elite caused amazement among his former cellmates. …Mr Baptista da Silva’s comeuppance began when the UN confirmed to a Portuguese TV station last month that he did not work for the organisation, not even as a volunteer, as he later alleged. Further media investigations uncovered his prison record and fake university titles… Mr Baptista da Silva has now disappeared completely from public life, and there are reports he is under investigation for fraud charges by the police.

I guess if he was intentionally misrepresenting himself, that perhaps da Silva should go back to jail. Though a lot of real economists and almost all politicians should be in prison as well if that’s the standard.

Let me close by making a serious point. Economists do not hold some magic source of knowledge about public policy. So I’ve never objected when journalists, political scientists, laymen, and others engage in debates about economic policy.

The key to good economic analysis, as Bastiat explained in the 1800s, is looking at the seen and the unseen. And you don’t have to be an economist to recognize that the secondary and tertiary effects of public policy are very important.

Indeed, if Paul Krugman’s any indication, maybe it’s better not to be an economist.

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The Basket Case Sometimes Known as Japan

Good fiscal policy doesn’t require heavy lifting. Governments simply need to limit the burden of government spending.

The key variable is making sure spending doesn’t consume ever-larger shares of economic output. In other words, follow Mitchell’s Golden Rule.

It’s possible for a nation to have a large public sector and be fiscally stable. Growth won’t be very impressive, but big government doesn’t automatically mean collapse. Sweden and Denmark are good role models for this approach.

And it’s even easier for a jurisdiction to have a small government and be fiscally stable, particularly since less spending and lower taxes are associated with prosperity. Hong Kong, Singapore, and Switzerland are good examples.

Unfortunately, many nations face fiscal death spirals. The burden of government spending keeps climbing, while private sectors gets hit over and over again with higher taxes. This destructive combination inevitably leads to fiscal collapse.

I’ve warned about potential fiscal crises in France, Greece, and the United Kingdom. I’ve even noted that the United States has a very dismal future if government policy stays on autopilot.

More spending and higher taxes!

But Japan may be poster child for reckless and irresponsible tax and spending policy.

Even though the public sector already is far too big and even though the government has incurred more debt than any other developed economy, the new Prime Minster thinks another Keynesian stimulus package is the recipe for economic revival.

I’m not joking. Even though the economy has been stagnant for 20 years – a period that has seen several so-called stimulus schemes, the government wants to throw good money after bad.

You won’t be surprised to learn that the New York Times approves of this new pork-fest.

The $116 billion stimulus package unveiled Friday by Japan’s new prime minister, Shinzo Abe, is a step in the right direction… Mr. Abe’s package of public-works spending…, investment tax credits and more spending on education and health care could help jump start the moribund Japanese economy. … Some forward-looking steps, like expanded health care spending, are already in the stimulus package.

Though if you read the entire editorial, at least the NYT acknowledged that this so-called stimulus should be accompanied by some long-term reforms such as fewer subsidies for politically powerful sectors of the Japanese economy.

Japan’s Fiscal Suicide

Now let’s shift to the tax side of the fiscal equation. We know that Japan has some of the highest tax rates in the industrialized world. Indeed, until last year, Japan was the only nation to have a higher corporate tax rate than the United States.

These high tax rates undermine competitiveness and hamper growth. Simply stated, the government is discouraging work, saving, investment, entrepreneurship, and other productive behaviors.

So what do you think the Japanese government is planning? You guessed it. Even higher tax rates. Here are some excerpts from a story at Tax-news.com.

…the ruling Liberal Democratic  Party (LDP) and its coalition partner, New Komeito, have now turned their attention  to ways to revise taxation, including increased taxes for the wealthiest taxpayers. …While there may be some disagreement within the coalition concerning an inheritance   tax rate rise for the largest estates, which is supported by New Komeito, there   is expected to be less of a problem over raising individual income tax rates   for the highest-earners. A progressive tax package, which might, for example, raise the present highest   40% income tax rate and reduce the JPY50m inheritance tax exemption amount,   is likely to be announced at a coalition meeting expected later this month.

I’m not going to pretend that I know when Japan’s economy implodes, but I think that collapse is almost inevitable at this point. Class warfare tax policy and Keynesian fiscal policy are not a recipe for a good outcome.

The real mystery is why both a state and a nation on the other side of the Pacific Ocean want to copy Japan’s suicidal fiscal policy?

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A Perfect Holiday Album for the Keynesians on Your Christmas List

I’m understandably partial to my video debunking Keynesian economics, and I think this Econ 101 video from the Center for Freedom and Prosperity does a great job of showing why consumer spending is a consequence of growth, not the driver.

But for entertainment value, this very funny video from EconStories.tv puts them to shame while also making important points about what causes economic growth.

The video was produced by John Papola, who was one of the creators of the famous Hayek v Keynes rap video, as well as its equally clever sequel.

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For the Sake of Intellectual Integrity, Republicans Should Not Cite the CBO When Arguing against Obama’s Proposed Fiscal-Cliff Tax Hike

I’ve commented before how the fiscal fight in Europe is a no-win contest between advocates of Keynesian deficit spending (the so-called “growth” camp, if you can believe that) and proponents of higher taxes (the “austerity” camp, which almost never seems to mean spending restraint).

That’s a left-vs-left battle, which makes me think it would be a good idea if they fought each other to the point of exhaustion, thus enabling forward movement on a pro-growth agenda of tax reform and reductions in the burden of government spending.

That’s a nice thought, but it probably won’t happen in Europe since almost all politicians in places such as Germany and France are statists. And it might never happen in the United States if lawmakers pay attention to the ideologically biased work of the Congressional Budget Office (CBO).

CBO already has demonstrated that it’s willing to take both sides of this left-v-left fight, and the bureaucrats just doubled down on that biased view in a new report on the fiscal cliff.

CBO economist prepares another Keynesian estimate

For all intents and purposes, the CBO has a slavish devotion to Keynesian theory in the short run, which means more spending supposedly is good for growth. But CBO also believes that higher taxes improve growth in the long run by ostensibly leading to lower deficits. Here’s what it says will happen if automatic budget cuts are cancelled.

Eliminating the automatic enforcement procedures established by the Budget Control Act of 2011 that are scheduled to reduce both discretionary and mandatory spending starting in January and maintaining Medicare’s payment rates for physicians’ services at the current level would boost real GDP by about three-quarters of a percent by the end of 2013.

Not that we should be surprised by this silly conclusion. The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.

But I think the short-run Keynesianism is not CBO’s biggest mistake. In the long-run, CBO wants us to believe that higher tax burdens translate into more growth. Check out this passage, which expresses CBO’s view the economy will be weaker 10 years from now if the tax burden is not increased.

…the agency has estimated the effect on output that would occur in 2022 under the alternative fiscal scenario, which incorporates the assumption that several of the policies are maintained indefinitely. CBO estimates that in 2022, on net, the policies included in the alternative fiscal scenario would reduce real GDP by 0.4 percent and real gross national product (GNP) by 1.7 percent.  …the larger budget deficits and rapidly growing federal debt would hamper national saving and investment and thus reduce output and income.

In other words, CBO reflexively makes two bold assumption. First, it assumes higher tax rates generate more money. Second, the bureaucrats assume that politicians will use any new money for deficit reduction. Yeah, good luck with that.

To be fair, the CBO report does have occasional bits of accurate analysis. The authors acknowledge that both taxes and spending can create adverse incentives for productive behavior.

…increases in marginal tax rates on labor would tend to reduce the amount of labor supplied to the economy, whereas increases in revenues of a similar magnitude from broadening the tax base would probably have a smaller negative impact or even a positive impact on the supply  of labor.  Similarly, cutting government benefit payments would generally strengthen people’s incentive to work and save.

But these small concessions do not offset the deeply flawed analysis that dominates the report.

But that analysis shouldn’t be a surprise. The CBO has a track record of partisan and ideological work.

While I’m irritated about CBO’s bias (and the fact that it’s being financed with my tax dollars), that’s not what has me worked up. The reason for this post is to grouse and gripe about the fact that some people are citing this deeply flawed analysis to oppose Obama’s pursuit of class warfare tax policy.

Why would some Republican politicians and conservative commentators cite a publication that promotes higher spending in the short run and higher taxes in the long run? Well, because it also asserts – based on Keynesian analysis – that higher taxes will hurt the economy in the short run.

…extending the tax reductions originally enacted in 2001, 2003, and 2009 and extending all other expiring provisions, including those that expired at the end of 2011, except for the payroll tax cut—and indexing the alternative minimum tax (AMT) for inflation beginning in 2012 would boost real GDP by a little less than 1½ percent by the end of 2013.

At the risk of sounding like a doctrinaire purist, it is unethical to cite inaccurate analysis in support of a good policy.

Consider this example. If some academic published a study in favor of the flat tax and it later turned out that the data was deliberately or accidentally wrong, would it be right to cite that research when arguing for tax reform? I hope everyone would agree that the answer is no.

Yet that’s precisely what is happening when people cite CBO’s shoddy work to argue against tax increases.

It’s very much akin to the pro-defense Republicans who use Keynesian arguments about jobs when promoting a larger defense budget.

To make matters worse, it’s not as if opponents lack other arguments that are intellectually honest.

• They could point out that higher marginal tax rates discourage productive behavior.
• They could point out that increased double taxation of saving and investment will hurt workers by reducing capital formation.
• They could point out that a larger tax burden will encourage a bigger burden of government spending.
• They could point out that revenues almost surely be less than what is projected because of the Laffer Curve.

So why, then, would anybody sink to the depths necessary to cite the Congressional Budget Office?

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No Matter How Hard He Tries, Obama Will Never Be as Bad as FDR

I’ve explained on many occasions that Franklin Roosevelt’s New Deal was bad news for the economy. And the same can be said of Herbert Hoover’s policies, since he also expanded the burden of federal spending, raised tax rates, and increased government intervention.

So when I was specifically asked to take part in a symposium on Barack Obama, Franklin Roosevelt, and the New Deal, I quickly said yes.

I was asked to respond to this question: “Was that an FDR-Sized Stimulus?” Here’s some of what I wrote.

President Obama probably wants to be another FDR, and his policies share an ideological kinship with those that were imposed during the New Deal. But there’s really no comparing the 1930s and today. And that’s a good thing. As explained by Walter Williams and Thomas Sowell, President Roosevelt’s policies are increasingly understood to have had a negative impact on the American economy. …what should have been a routine or even serious recession became the Great Depression.

In other words, my assessment is that Obama is a Mini-Me version of FDR, which is a lot better (or, to be more accurate, less worse) than the real thing.

To be sure, Obama wants higher tax rates, and he has expanded government control over the economy. And the main achievement of his first year was the so-called stimulus, which was based on the same Keynesian theory that a nation can become richer by switching money from one pocket to another. …Obama did get his health plan through Congress, but its costs, fortunately, pale in comparison to Social Security and its $30 trillion long-run deficit. And the Dodd-Frank bailout bill is peanuts compared to all the intervention of Roosevelt’s New Deal. In other words, Obama’s policies have nudged the nation in the wrong direction and slowed economic growth. FDR, by contrast, dramatically expanded the burden of government and managed to keep us in a depression for a decade. So thank goodness Barack Obama is no Franklin Roosevelt.

The last sentence of the excerpt is a perfect summary of my remarks. I think Obama’s policies have been bad for the economy, but he has done far less damage than FDR because his policy mistakes have been much smaller.

“Hey, don’t sell me short. Just wait to see how much havoc I can wreak if reelected!”

Moreover, Obama has never proposed anything as crazy as FDR’s “Economic Bill of Rights.” As I pointed out in my article, this “would have created a massive entitlement state—putting America on a path to becoming a failed European welfare state a couple of decades before European governments made the same mistake.”

On the other hand, subsequent presidents did create that massive entitlement state and Obama added another straw to the camel’s back with Obamacare.

And he is rigidly opposed to the entitlement reforms that would save America from becoming another Greece.

So maybe I didn’t give him enough credit for being as bad as FDR.

P.S. Here’s some 1930s economic humor, and it still applies today. And I also found this cartoon online.

And here’s a good Mini-Me image involving Jimmy Carter. I wasn’t able to find one of Obama and FDR.

If anybody has the skill to create such an image, please send it my way.

P.P.S. The symposium also features an excellent contribution from Professor Lee Ohanian of UCLA.

And from the left, it’s interesting to see that Dean Baker of the Center for Economic and Policy Research basically agrees with me.

But only in the sense that he also says Obama is a junior-sized version of FDR. Dean actually thinks Obama should have embraced his inner-FDR and wasted even more money on an even bigger so-called stimulus.

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An Invaluable Economic History Lesson from Thomas Sowell: Politicians Should Only “Do Something” If that Means Doing Less

The great Ronald Reagan famously said (and I am paraphrasing, since I do not remember the exact phrase) that the most dangerous words in the English language were “I am from Washington and I am here to help you.”

Those are very wise words, especially when we think of the damage politicians have done because of their impulse to “do something” when the economy stumbles. The problem is not that there is nothing that needs to be fixed. The problem is that the crowd in Washington is far more likely to make things worse rather than better.

And who better to explain this than Thomas Sowell.

Sowell starts his most recent column by explaining that politicians who want to “do something” almost always want to expand the burden of government spending, but he notes that this approach has meant deeper recessions and more economic suffering. And he cites Warren Harding as an example of a President who rejected the notion that bigger government was some sort of economic elixir.

…you might think that the economy requires government intervention to revive and create jobs. It is Beltway dogma that the government has to “do something.” History tells a different story. For the first 150 years of this country’s existence, the federal government felt no great need to “do something” when the economy turned down. Over that long span of time, the economic downturns were neither as deep nor as long lasting as they have been since the federal government decided that it had to “do something” in the wake of the stock market crash of 1929, which set a new precedent. One of the last of the “do nothing” presidents was Warren G. Harding. In 1921, under President Harding, unemployment hit 11.7 percent — higher than it has been under President Obama. Harding did nothing to get the economy stimulated. Far from spending more money to try to “jump start” the economy, President Harding actually reduced government spending.

Can we learn any lessons from Harding’s anti-Keynesian approach? Assuming we want more growth and less unemployment, the answer is yes (and we can also learn the lesson that Hoover was a moronic statist from the very beginning).

President Harding deliberately rejected the urging of his own Secretary of Commerce, Herbert Hoover, to intervene. The 11.7 percent unemployment rate in 1921 fell to 6.7 percent in 1922, and then to 2.4 percent in 1923. It is hard to think of any government intervention in the economy that produced such a sharp and swift reduction in unemployment as was produced by just staying out of the way and letting the economy rebound on its own. Bill Clinton loudly proclaimed to the delegates to the Democratic National Convention that no president could have gotten us out of the recession in just one term. But history shows that the economy rebounded out of a worse unemployment situation in just two years under Harding, who simply let the market revive on its own, as it had done before, time and time again for more than a century.

Allow me to actually quibble with what Sowell wrote. Harding didn’t “let the market revive on its own.” He helped the economy grow faster by shrinking the federal budget. As Jim Powell explained in National Review, “Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922.”

That’s a stunning statistic, akin to cutting more than $1.5 trillion from today’s bloated federal budget.

Sowell  also cites the achievements of the Gipper. Since I’ve posted some powerful comparisons of Reaganomics and Obamanomics, this is music to my ears.

Something similar happened under Ronald Reagan. Unemployment peaked at 9.7 percent early in the Reagan administration. Like Harding and earlier presidents, Reagan did nothing, despite outraged outcries in the media. The economy once again revived on its own. Three years later, unemployment was down to 7.2 percent — and it kept on falling, as the country experienced twenty years of economic growth with low inflation and low unemployment. The Obama party line is that all the bad things are due to what he inherited from Bush, and the few signs of recovery are due to Obama’s policies beginning to pay off. But, if the economy has been rebounding on its own for more than 150 years, the question is why it has been so slow to recover under the Obama administration.

By the way, Sowell also could have mentioned what happened in the United States immediately after World War II. The Keynesians were predicting a return to depression because of big reductions in government spending and the demobilization of millions of troops. But as Richard Vedder and Jason Taylor explained for the Cato Institute, the economy quickly adjusted and rebounded precisely because politicians didn’t revive the New Deal (and, as you can see from this video, President Reagan understood this bit of economic history).

Sowell also explains how FDR made a bad situation worse in the 1930s.

A great myth has grown up that President Franklin D. Roosevelt saved the American economy with his interventions during the Great Depression of the 1930s. But a 2004 economic study concluded that government interventions had prolonged the Great Depression by several years. Obama is repeating policies that failed under FDR.

In previous posts, I have cited both Sowell and the Wall Street Journal to make this very point, but I also call your attention to this post referencing the seminal work of Robert Higgs, as well as this video on the pernicious role of government intervention in the 1930s.

Last but not least, check out this video to understand more about FDR and his malignant views.

P.S. Fans of Professor Sowell can read more of his work here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here. And you can see him in action here.

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A Picture Says a Thousand Words: President Obama’s Dismal Failure on Jobs

If it wasn’t for the fact that so many people are suffering and being seduced into empty lives of government dependency (symbolized by Julia, the world’s most disappointing daughter), I might feel sorry for President Obama.

He promised unemployment would never climb above 8 percent if Congress squandered $800 billion on a Keynesian stimulus scheme.

Well, Congress said yes and the results have not been pretty. And every month we get new numbers to show us that the Administration’s policies have failed. It’s like Chinese water torture for the White House.

The numbers released this morning from the Department of Labor don’t change the narrative. The Republican and Democratic spin-doctors obviously will spit out their talking points, but here’s a visual put together by Political Math that trumps all the political maneuvering. If you’re wondering where Obama is, look at the lower left portion of the image.

This image is a couple of months old, but job creation has been so anemic that the naked eye wouldn’t be able to tell the difference if it was updated.

Since I normally show a graph with the actual unemployment rate compared to what Obama promised, I’ll add that as well. Not a pretty picture. I wrote that last month’s version would cause anxiety for Obama, and see no reason to change that assessment.

Yes, the official unemployment rate dropped to 8.1 percent, but that was because more Americans dropped out of the labor force.

Most important, the rate of joblessness is about 2-1/2 to 3 percentage points higher than what Obama promised. Now he wants a second term, yet all he’s promising is more of the same.

Actually, I retract that statement. He wants to maintain his current approach, but then add some class-warfare taxes to the mix.

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I Don’t Know if Ryan Will Help Romney Win, but His Budget Would Help the Economy

While most people in Washington are focused on the political implications of adding Paul Ryan to the GOP ticket, my only concern is trying to limit the size and scope of government so we can enjoy more freedom and prosperity.

In this debate for PBS, I explain that the Ryan budget would boost the economy – but only if Republicans actually followed through on their rhetoric and did the right thing after obtaining power.

A few comments on the debate. I channel the wisdom of Mitchell’s Golden Rule by saying the most important goal is restraining the growth of federal spending.

I fully agree with Jared that the GOP economic plans won’t work if Republicans get squeamish about doing what’s best for America. If Romney wins, and does a repeat of the statist Bush years, the GOP will deserve to be cast out of power for decades.

At the end of our interview, I obviously disagreed with Jared’s embrace of the Keynesian fantasy that more government spending magically increases growth. If I was feeling mean, I could have pointed out that he was the co-author of the infamous report claiming that Obama’s so-called stimulus would keep unemployment below 8 percent.

I also appeared on Bloomberg TV to comment on Ryan’s economic plan.

It won’t surprise regular readers of this blog that I emphasized the importance of restraining the growth of government so that the burden of the public sector shrinks as a share of overall economic output.

In my second soundbite, I make a simple point about the Laffer Curve. As we saw in the 1980s, lower tax rates don’t automatically mean lower tax revenues.

I also point out the similarities between what Paul Ryan is proposing today with what was achieved in the 1990s during the Clinton Administration.

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Republican Keynesians Come Out of the Woodwork to Oppose Sequestration

Beginning with the very first policy-oriented post on this blog, I’ve been criticizing Keynesian economics, usually with lots of cheering and support from the GOP. Indeed, more than 98 percent of Republicans in the House and Senate voted against Obama’s so-called stimulus.

They understood – or at least seemed to understand – that you don’t create jobs by diverting money from the private sector so it can be spent by politicians in Washington.

And they have the satisfaction of seeing history justify their votes. Unemployment rose after the faux stimulus was enacted and the joblessness rate has stayed above 8 percent.

But some Republicans are now sounding like born-again Keynesians. They object to the automatic budget savings – known as sequestration – that are scheduled to take effect next year, and they are warning that less government spending means fewer jobs. Here’s a small sampling of their statements.

• Cong. Rob Bishop of Utah claims a sequester will “destroy jobs.”
• Sen. Roger Wicker of Mississippi asserts that “up to 1 million jobs are at risk.”
• Gov. Bob McDonnell of Virginia says that sequestration is “putting hundreds of thousands of jobs in my state at risk.”

I would have no objection to these lawmakers arguing against a sequester if they based their concerns on national security, even if I think those concerns are exaggerated.

And I would understand if they objected to a sequester because defense is disproportionately impacted (the Pentagon accounts for only about one-fourth of the budget, yet it absorbs one-half of the sequester).

And I wouldn’t even complain if they claimed that a sequester is painful because of short-term economic dislocation and transition costs. Heck, I even said that might be a legitimate excuse when Mitt Romney said something that sounded suspiciously Keynesian.

But it doesn’t seem like those caveats apply.

Let’s close with some good news and bad news. The good news is that I don’t actually think any of the anti-sequestration lawmakers are genuine Keynesians.

The bad news is that they are genuine politicians, so they think there is nothing wrong with using the coercive power of government to take as much from the rest of the country as possible and redistribute those resources to their states or districts.

They may vaguely understand that big government undermines economic performance, but that’s a secondary concern. They’re main goal is buying votes with other people’s money.

P.S. You can peruse some good cartoons about Keynesian economics by clicking here, here, here, and here.

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Jobless Rate Climbs to 8.3 Percent, Creating More Anxiety for Obama and the Left

Can we finally all agree that Keynesian economics is a flop? The politicians in Washington flushed about $800 billion down the toilet and we got nothing in exchange except for anemic growth and lots of people out of work.

Indeed, we’re getting to the point where the monthly employment reports from the Labor Department must be akin to Chinese water torture for the Obama Administration. Even when the unemployment rate falls, it gives critics an opportunity to recycle the chart below showing how bad the economy is doing compared to what the White House said would happen if the so-called stimulus was enacted.

But for the past few months, the joblessness rate has been rising, making the chart look even worse.

I never watch TV, so I’m not in a position to know for sure, but I haven’t seen any articles indicating that the Romney campaign is using this data in commercials to criticize Obama.

This seems like a missed opportunity.

But since it’s not clear to me that Romney would actually do anything different than Obama (check out this post if that seems like an odd assertion), I don’t focus on the political implications.

Instead, I’m hoping the American people will learn an important long-run lesson. If you want more growth and prosperity, the recipe is smaller government and free markets.

In other words, our economic policy should be more like Hong Kong and Singapore, but Obama has been making us more like France.

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A Cartoon Showing the Logic (or lack thereof) of Keynesian Economics

I’ve run across very few good cartoons about Keynesian economics. If my aging memory is correct, I’ve only posted two of them.

But at least they’re both very good. We have one involving Obama, sharks, and a lifeboat, and another one involving an overburdened jockey.

Now we have a third cartoon to add to the collection.

To provide a bit of additional background, the cartoon is channeling Bastiat’s broken-window insight that make-work projects don’t create prosperity, as explained in this short video narrated by Tom Palmer.

I make similar points in this post mocking Krugman’s wish for an alien invasion and this post explaining why Obama’s green energy programs lead to net job destruction.

P.S. This Wizard of Id parody is the best cartoon about economics, but it teaches about labor markets rather than Keynesianism.

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Another Month of Data Re-Confirms Obama’s Horrible Record on Jobs

Remember back in 2009, when President Obama and his team told us that we needed to squander $800 billion on a so-called stimulus package.

The crowd in Washington was quite confident that Keynesian spending was going to save the day, even though similar efforts had failed for Hoover and Roosevelt in the 1930s, for Japan in the 1990s, and for Bush in 2008.

Nonetheless, we were assured that Obama’s stimulus was needed to keep unemployment from rising above 8 percent.

Well, that claim turned out to be quite hollow. Not that we needed additional evidence, but the new numbers from the Labor Department re-confirm that the White House prediction was wildly inaccurate. The 8.2 percent unemployment rate is 2.5 percentage points above the Administration’s prediction.

Defenders of the Obama Administration sometimes respond by saying that the downturn was more serious than anyone predicted. That’s a legitimate assertion, so I don’t put too much blame the White House for the initial spike in joblessness.

But I do blame them for the fact that the labor market has remained weak for a lengthy period. This chart, which I just generated this morning on the Minneapolis Fed’s interactive website, shows employment data for all the post-World War II recessions.

The current business cycle is the red line. As you can see, some recessions were deeper in the beginning and some were more mild. But the one thing that is unambiguous is that we’ve never had a jobs recovery as anemic as the one we’re experiencing today.

Job creation has been extraordinarily weak. Indeed, the 8.2 percent unemployment rate actually masks the bad news since it doesn’t capture all the people who have given up and dropped out of the labor force.

By the way, I don’t think the so-called stimulus is the main cause of today’s poor employment data. The vast majority of that money was pissed away in 2009, 2010, and 2011.

Today’s weak job market is affected by things such as the threat of higher taxes in 2013 (when the 2001 and 2003 tax cuts are scheduled to expire), the costly impact of Obamacare, and the harsh regulatory environment. This cartoon shows, in an amusing fashion, the impact of these policies on entrepreneurs and investors.

P.S. Click on this link if you want to compare Obamanomics and Reaganomics. The difference is astounding.

P.P.S. Obama will probably continue to blame “headwinds” for the dismal job numbers, so this cartoon is definitely worth sharing.

P.P.P.S. Since I’m sharing cartoons, I can’t resist recycling this classic about Keynesian stimulus.

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Debating Keynesian Economics with Robert Reich on CNN

It seems that any argument about the economy eventually boils down to the core issue of whether government spending acts as a stimulus or whether it is – in the words of Thomas Sowell – a sedative that undermines prosperity.

So when Robert Reich and I went on Erin Burnett’s CNN show to discuss Obama’s stumbling economic performance, much of our discussion focused on whether to further expand the burden of the public sector.

Here are a couple of observations about the interview.

1. Reich admitted that spending is a problem and in the “long term” needs to be reduced. I suspect “long term” never arrives in Reich’s world, but this is nonetheless a startling concession on his part.
2. Reich claimed World War II was an example of successful Keynesian stimulus, but if he wants to make that argument, then he needs to explain why we didn’t fall back into the Great Depression after the war – which is what all the Keynesians warned would happen.
3. For reasons outlined in my beat-down of Krugman, I’ve become a cheerleader for Estonia and used the interview to promote that country’s fiscal restraint.

If you want to understand more about Keynesian economics and why it doesn’t work, this video will be more instructive than my food fight with Reich.

P.S. Obama is monotonously repetitive in his claim that the economy is facing headwinds. As this Ramirez cartoon illustrates, he’s right, but not in the way he thinks.

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Will More Federal Debt Improve the U.S. Government’s Creditworthiness?

Writing in today’s Washington Post, former Obama economist Larry Summers put forth the strange hypothesis that more red ink would improve the federal government’s long-run fiscal position.

This sounds like an excuse for more Keynesian spending as part of another so-called stimulus plan, but Summers claims to have a much more modest goal of prudent financial management.

And if we assume there’s no hidden agenda, what he’s proposing isn’t unreasonable.

But before floating his idea, Summers starts with some skepticism about more easy-money policy from the Fed.

Many in the United States and Europe are arguing for further quantitative easing to bring down longer-term interest rates. …However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to undertake with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative rate. There is also the question of whether extremely low, safe, real interest rates promote bubbles of various kinds.

This is intuitively appealing. I try to stay away from monetary policy issues, but whenever I get sucked into a discussion with an advocate of easy money/quantitative easing, I always ask for a common-sense explanation of how dumping more liquidity into the economy is going to help.

Maybe it’s possible to push interest rates even lower, but it certainly doesn’t seem like there’s any evidence showing that the economy is being held back because today’s interest rates are too high.

Moreover, what’s the point of “pushing on a string” with easy money if it just means more reserves sitting at the Fed?

After suggesting that monetary policy isn’t the answer, Summers then proposes to utilize government borrowing. But he’s proposing more debt for management purposes, not Keynesian stimulus.

Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more, not less, and investing in improving their future fiscal position, even assuming no positive demand stimulus effects of a kind likely to materialize with negative real rates. They should accelerate any necessary maintenance projects — issuing debt leaves the state richer not poorer, assuming that maintenance costs rise at or above the general inflation rate. …Similarly, government decisions to issue debt, and then buy space that is currently being leased, will improve the government’s financial position as long as the interest rate on debt is less than the ratio of rents to building values — a condition almost certain to be met in a world with government borrowing rates below 2 percent. These examples are the place to begin because they involve what is in effect an arbitrage, whereby the government uses its credit to deliver essentially the same bundle of services at a lower cost. …countries regarded as havens that can borrow long term at a very low cost should be rushing to take advantage of the opportunity.

Much of this seems reasonable, sort of like a homeowner taking advantage of low interest rates to refinance a mortgage.

But before embracing this idea, we have to move from the dream world of theory to the real world of politics. And to his credit, Summers offers the critical caveat that his idea only makes sense if politicians use their borrowing authority for the right reasons.

There is, of course, still the question of whether more borrowing will increase anxiety about a government’s creditworthiness. It should not, as long as the proceeds of borrowing are used either to reduce future spending or raise future incomes.

At the risk of being the wet-blanket curmudgeon who ruins the party by removing the punch bowl, I have zero faith that politicians would make sound decisions about financial management.

I wrote last month that eurobonds would be “the fiscal version of co-signing a loan for your unemployed alcoholic cousin who has a gambling addiction.”

Well, giving politicians more borrowing authority in hopes they’ll do a bit of prudent refinancing is akin to giving a bunch of money to your drug-addict brother-in-law in hopes that he’ll refinance his credit card debt rather than wind up in a crack house.

Considering that we just saw big bipartisan votes to expand the Export-Import Bank’s corporate welfare and we’re now witnessing both parties working on a bloated farm bill, good luck with that.

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Another Magnificent Moment in the World of Government Stimulus

Most of my work on government stimulus focuses on economic theory and evidence.

But every so often it’s a good idea to remind ourselves of the ridiculous ways that government wastes money.

Here are some details from a boondoggle in West Virginia.

Nobody told Hurricane librarian Rebecca Elliot that the $22,600 Internet router in the branch library’s storage closet was powerful enough to serve an entire college campus. Nobody told Elliot how much the router cost or who paid for it. Workers just showed up and installed the device. They left behind no instructions, no user manual. The high-end router serves four public computer terminals at the small library in Putnam County. …The state of West Virginia is using $24 million in federal economic stimulus money to put high-powered Internet computer routers in small libraries, elementary schools and health clinics, even though the pricey equipment is designed to serve major research universities, medical centers and large corporations, a Gazette-Mail investigation has found. …The Cisco 3945 series routers, which cost $22,600 each, are built to serve “tens of thousands” of users or device connections, according to a Cisco sales agent. The routers are designed to serve a minimum of 500 users. Yet state broadband project officials directed the installation of the stimulus-funded Cisco routers in West Virginia schools with fewer than a dozen computers and libraries that have only a single terminal for patrons.

Sounds like the government could have bought every user a laptop and squandered less money.

It’s important to realize that this type of boondoggle is the rule, not the exception. Every so often, we see stories about absurd waste, such as the $423,000 study to find out that men don’t like to wear condoms, the Pentagon spending $900 on a $7 control switch, or a $100,000 library grant to a city without a library.

We should get upset about these examples. But remember that the second cartoon in this post is exactly right. The waste, fraud, and pork that we find out about is dwarfed by what remains hidden.

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Paul Krugman and the European Austerity Myth

With both France and Greece deciding to jump out of the left-wing frying pan into the even-more-left-wing fire, European fiscal policy has become quite a controversial topic.

But I find this debate and discussion rather tedious and unrewarding, largely because it pits advocates of Keynesian spending (the so-called “growth” camp) against supporters of higher taxes (the “austerity” camp).

Since I’m a big fan of nations lowering taxes and reducing the burden of government spending, I would like to see the pro-tax hike and the pro-spending sides both lose (wasn’t that Kissinger’s attitude about the Iran-Iraq war?). Indeed, this is why I put together this matrix, to show that there is an alternative approach.

One of my many frustrations with this debate (Veronique de Rugy is similarly irritated) is that many observers make the absurd claim that Europe has implemented “spending cuts” and that this approach hasn’t worked.

Here is what Prof. Krugman just wrote about France.

The French are revolting. …Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. …What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.

And he’s made similar assertions about the United Kingdom, complaining that, “the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback.”

So let’s take a look at the actual data and see how much “slashing” has been implemented in France and the United Kingdom. Here’s a chart with the latest data from the European Union.

I’m not sure how Krugman defines austerity, but it certainly doesn’t look like there’s been a lot of “slashing” in these two nations.

To be fair, government spending in the United Kingdom has grown a bit slower than inflation in the past couple of years, so one could say that there’s been a very modest bit of trimming.

There’s been no fiscal restraint in France, however, even if one uses that more relaxed definition of a cut. The only accurate claim that can be made about France is that the burden of government spending hasn’t been growing quite as fast since the crisis began as it was growing in the preceding years.

This doesn’t mean there haven’t been any spending cuts in Europe. The Greek and Spanish governments actually cut spending in 2010 and 2011, and Portugal reduced outlays in 2011.

But you can see from this chart, which looks at all the PIIGS (Portugal, Italy, Ireland, Greece, and Spain), that the spending cuts have been very modest, and only came after years of profligacy. Indeed, Greece is the only nation to actually cut spending over the 3-year period since the crisis began.

Krugman would argue, of course, that the PIIGS are suffering because of the spending cuts. And since there actually have been spending cuts in the last year or two in these nations, does that justify his claims?

Yes and no. I don’t agree with the Keynesian theory, but that doesn’t mean it is easy or painless to shrink the burden of government. As I wrote earlier this year, “…the economy does hit a short-run speed bump when the public sector is pruned. Simply stated, there will be transitional costs when the burden of public spending is reduced. Only in economics textbooks is it possible to seamlessly and immediately reallocate resources.”

What I would argue, though, is that these nations have no choice but to bite the bullet and reduce the burden of government. The only other alternative is to somehow convince taxpayers in other nations to make the debt bubble even bigger with more bailouts and transfers. But that just makes the eventual day of reckoning that much more painful.

Additionally, I think much of the economic pain in these nations is the result of the large tax increases that have been imposed, including higher income tax rates, higher value-added taxes, and various other levies that reduce the incentive to engage in productive behavior.

So what’s the best path going forward? The best approach is to implement deep and meaningful spending cuts, and I think the Baltic nations of Estonia, Lithuania, and Latvia are positive role models in this regard. Let’s look at what they’ve done in recent years.

As you can see from the chart, the burden of government spending was rising at a reckless rate before the crisis. But once the crisis hit, the Baltic nations hit the brakes and imposed genuine spending cuts.

The Baltic nations went through a rough patch when this happened, particularly since they also had their versions of a real estate bubble. But, as I’ve already argued, I think the “cold turkey” or “take the band-aid off quickly” approach has paid dividends.

The key question is whether nations can maintain spending restraint, particularly when (if?) the economy begins to grow again.

Even a basket case like Greece can put itself on a good path if it follows Mitchell’s Golden Rule and simply makes sure that government spending, in the long run, grows slower than the private economy.

The way to make that happen is to implement something similar to the Swiss Debt Brake, which effectively acts as an annual cap on the growth of government.

In the long run, of course, the goal should be to shrink the overall burden of government to its growth-maximizing level.

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Doubling Down on Failure: Former Obama Official Calls for U.S.-Financed Keynesian Spending Binge in Europe

There’s an old saying that insanity is doing the same thing over and over again while expecting different results. This certainly is a good description of Keynesians, who relentlessly push more government spending as some sort of magic potion for the economy – notwithstanding a record of failure.

The latest example if Larry Summers, the former economist for the Obama White House, who says Europeans need to make government bigger.

Here is some of what he writes for today’s Washington Post.

European efforts to contain crisis have fallen short. …Much of what is being urged on and in Europe is likely to be not just ineffective but counterproductive to maintaining the monetary union, restoring normal financial conditions and government access to markets, and reestablishing economic growth. The premise of European policymaking is that countries are overindebted and so unable to access markets on reasonable terms, and that the high interest rates associated with excessive debt hurt the financial system and inhibit growth. The strategy is to provide financing while insisting on austerity, in hopes that countries can rein in their excessive spending enough to restore credibility, bring down interest rates and restart economic growth.

The good news is that Summers recognizes that there has been “excessive spending.” The bad news is that he uses the wrong definition of austerity.

Many European nations seem to think higher taxes are a sign of fiscal conservatism (see this post by Veronique de Rugy for a good discussion of this confusion). Summers accepts that approach, and says that policy makers should choose a Keynesian policy instead.

Unfortunately, Europe has misdiagnosed its problems in important respects and set the wrong strategic course. …Europe’s problem countries are in trouble because the financial crisis underway since 2008 has damaged their financial systems and led to a collapse in growth. High deficits are much more a symptom than a cause of their problems. And treating symptoms rather than underlying causes is usually a good way to make a patient worse. …The right focus for Europe is on growth; in this dimension, increased austerity is a step in the wrong direction.

There’s more good news. Summers is right in stating that Europe suffers from low growth. And I agree with him that the European version of austerity – higher taxes – is not a solution.

But, as always, there is a catch. Summers has the wrong approach on how to encourage growth. He wants Keynesian spending, and here is his defense.

 Skeptics will rightly wonder how a prescription for more spending by countries that already have trouble borrowing can be correct. The answer lies in the difference between borrowing by individuals and countries. Normally, an individual helps his creditors by borrowing less; but a person who stops borrowing to finance commuting to his job does his creditors no favor. A country’s income is determined by spending, so a country that pursues austerity to the point where its economy is driven into a downward spiral does its creditors no favor.

Sounds semi-reasonable. After all, everyone understands that it is important to get to their place of employment. Sometimes you spend money to make money.

But here’s the problem. Can anyone name anything in so-called stimulus schemes that actually increase a nation’s productive capacity? As we saw with Obama’s failed stimulus, lots of money gets distributed, but the main purpose seems to be buying votes and creating dependency.

What about jobs? A miserable failure.

Adding insult to injury, you probably won’t be surprised to learn that American taxpayers are supposed to pick up the lion’s share of the tab for the new spending in Europe since Summers wants the IMF to be the sugar daddy.

Going forward, the IMF and international community should condition further support not merely on individual countries’ actions but on a common European commitment to growth.

This approach is illogical, as explained in this video.

And let’s consider the historical record. Nations that have tried this type of “stimulus” have not fared well. Big spending increase under Hoover and Roosevelt failed in the 1930s. Japan tried several Keynesian packages and failed in the 1990s. Bush failed in 2008 and Obama failed in 2009.

Germany did not go with a big program of government spending, and they did better than the United States. The same is true about Canada. But the real success story is the Baltic nations. They imposed real spending restraint, not the fake austerity found in places such as the United Kingdom.

And even though it caused some short-term pain since there’s a short-term cost when labor and capital get redeployed to more productive uses, the Baltic nations are now in much better shape that the European nations that have floundered because they limited themselves to the no-win choice of Keynesianism and tax hikes.

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Portuguese Finance Minister Admits Keynesian Stimulus Was a Flop, but Don’t Hold Your Breath Waiting for Obama to Make a Similar Confession

President Obama imposed a big-spending faux stimulus program on the economy back in 2009, claiming that the government needed to squander about $800 billion to keep the unemployment rate from rising above 8 percent.

How did that work out? One possible description is that the so-called stimulus became a festering pile of manure. About three years have passed, and the joblessness rate hasn’t dropped below 8 percent. But the White House has been sprinkling perfume on that pile of you-know-what and claiming that the Keynesian spending binge was good policy.

But not every politician is blindly ideological like Obama. Vitor Gaspar, Portugal’s Finance Minister, is willing to admit error. Here are some relevant excerpts from a New York Times report.

Unlike Obama, willing to admit mistakes

Mr. Gaspar, speaking to The New York Times last week, has a message for observers who say Europe needs to substantially relax its austerity approach: We tried stimulus and it backfired. Like some other European countries, Portugal tried what Mr. Gaspar called “a Keynesian style expansion” in 2008, referring to a theory by economist John Maynard Keynes. But it didn’t turn things around, and may have made things worse.

Why does the Portuguese Finance Minister have this view? Well, for the simple reason that the economy got worse and more spending put his country in a deeper fiscal ditch.

The yield on Portuguese government bonds – more than 11 percent on longer-term bonds — is substantially higher than the yields on debt issued by Ireland, Spain or Italy. …The main fear among investors is that Portugal is going to have to ask for a second bailout from the International Monetary Fund and the European Union, which committed $103 billion of financial aid in 2011.

Maybe the big spenders in Portugal should import some of the statist bureaucrats at Congressional Budget Office. The CBO folks could then regurgitate the moving-goalposts argument that they’ve used in the United States and claim that the economy would be even weaker if the government hadn’t wasted more money.

But perhaps the Portuguese left doesn’t think that will pass the laugh test.

Amazingly, the Germans, who have a disturbing affinity for powerful government, decided against Keynesianism and that’s paid dividends for their economy.

In any event, some of us can say we were right from the beginning about this issue.

Not that being right required any keen insight. Keynesian policies failed for Hoover and Roosevelt in the 1930s. So-called stimulus policies also failed for Japan in 1990s. And Keynesian proposals failed for Bush in 2001 and 2008.

Just in case any politicians are reading this post, I’ll make a point that normally goes without saying: Borrowing money from one group of people and giving it to another group of people does not increase prosperity.

But since politicians probably aren’t capable of dealing with a substantive argument, let’s keep it simple and offer three very insightful cartoons: here, here, and here.

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What’s the Difference between a Libertarian, a Supply-Sider, a Keynesian, and an IMF Bureaucrat?

I realize the title of this post sounds like the beginning of a joke, along the lines of “A priest, a minister, and a rabbi walk into a bar…”, but this is a serious topic.

A big problem in fiscal debates is that people can’t even agree on what they mean by certain words. For instance, what’s the definition of austerity? Is it budget cuts, higher taxes, or both? Why are people saying the United Kingdom is practicing austerity, when the burden of government spending is going up?

Or how do we define responsible fiscal policy? Should politicians try to balance budgets, or should they shrink the burden of government? Is it reasonable for some people to call Obama a conservative because he wants higher taxes and claims the money would be used to reduce red ink?

I grapple with some of these questions in this appearance on Fox Business News.

But I’m not happy with my performance, largely because there needs to be a simple way of categorizing the various approaches to fiscal policy. So that’s what I’ve done in this Table. This is a first draft, so I welcome suggestions.

I’m serious about looking for input, For instance, I would like to come up with some way to describe Bushonomics without sullying the name of supply-side economics.

But perhaps I am just sensitive to that issue because supply-side economists tend to be serious and sober people who favor smaller government, but some of the politicians associated with supply-side economics – such as Jack Kemp – have been unapologetic big spenders.

I’m also unhappy with the division between IMFers and Keynesians, which is strange because it seems like half of my time is devoted to battling statists who argue for more government spending and the other half is consumed by fights against proponents of higher taxes.

What makes this so frustrating, though, is that Keynesians and IMFers are usually the same people, even though the philosophies are supposedly inconsistent.

I suspect that all they really want is bigger government, and they use any sign of weakness to argue for more spending, and then they quickly pivot and ask for higher taxes because of red ink. The biased analysis of the Congressional Budget Office is a good example.

The right approach, needless to say, is libertarianism. Small government and low tax rates are the pro-growth, pro-freedom recipe. That’s the one part of the Table that’s right on the mark.

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