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Posts Tagged ‘Keynesian Economics’

Regular readers know that good fiscal policy takes place when government spending grows slower than the private economy.

Nations that maintain this Golden Rule for extended periods of time shrink the relative burden of government spending, thus enabling more growth by freeing up resources for the productive sector of the economy and creating leeway for lower tax rates.

And when countries deal with the underlying disease of too much spending, they automatically solve the symptom of red ink, so it’s a win-win situation whether you’re a spending hawk or a so-called deficit hawk.

With this in mind, let’s look at some interesting new research from the Heritage Foundation. They’ve produced a report entitled Europe’s Fiscal Crisis Revealed: An In-Depth Analysis of Spending, Austerity, and Growth.

It focuses on fiscal policy over the past few years and is an important contribution in two big ways. First, it shows that the Keynesian free-lunch approach is counterproductive. Second, it shows that the right kind of fiscal consolidation (i.e., spending restraint) generates superior results.

Here are some excerpts from the chapter by Professor Alberto Alesina of Harvard of Veronique de Rugy of the Mercatus Center. They look at some of the academic evidence.

The debate over the merits of austerity (the implementation of debt-reduction packages) is frustrating. Most people focus only on deficit reduction, but that can be achieved in many different ways. Some ways, such as raising taxes, deeply hurt growth… The data show that austerity has been implemented in Europe. However, with some rare exceptions, the forms of austerity were heavy on tax increases and far from involving savage spending cuts. …spending-based adjustments are more likely to reduce the debt-to-GDP ratio, regardless of whether fiscal adjustments are defined in terms of improvements in the cyclically adjusted primary budget deficit or in terms of premeditated policy changes designed to improve a country’s fiscal outlook. …Other research has found that fiscal adjustments based mostly on the spending side are less likely to be reversed and, as a result, have led to more long-lasting reductions in debt-to-GDP ratios. …successful fiscal adjustments are often rooted in reform of social programs and reductions in the size and pay of the government workforce rather than in other types of spending cuts. …tax increases failed to reduce the debt and were associated with large recessions. …growing evidence suggests that private investment tends to react more positively to spending-based adjustments. For instance, data from Alesina and Ardagna and from Alesina, Favero, and Giavazzi show that private-sector capital accumulation increases after governments cut spending.

The basic message of the Alesina-de Rugy chapter is that bad outcomes are largely unavoidable when nations spend themselves into fiscal trouble, but the damage can be minimized if policy makers impose spending restraint.

The Heritage Foundation’s Salim Furth is the editor of the report, and here’s some of what he wrote in Chapter 3, which looks at what’s happened in recent years as countries dealt with fiscal crisis.

Tax austerity is very harmful to growth, while spending cuts are partially replaced by private-sector activity, making them less harmful. …Estimating growth effects on private GDP, the difference between tax and spending multipliers grows predictably. A two-dollar decline in private GDP is associated with every dollar of tax increases, but spending cuts are associated with no change in private GDP.  …fiscal consolidation that relied 60 percentage points more on spending cuts was associated with 3.1 percentage points more GDP growth from 2009 to 2012, when average growth was just 3.3 percent over the entire period. In other words, a country that had a fiscal consolidation composed of 80 percent of spending cuts and 20 percent of tax increases would grow much more rapidly than a country in which only 20 percent of the consolidation was spending cuts and 80 percent was tax increases. The association is slightly stronger for private GDP.

Salim then cites a couple of powerful examples.

…the difference between Germany’s 8 percent growth from 2009 to 2012 and the 1 percent growth in the Netherlands is largely accounted for by Germany’s cut-spending, cut-taxes approach and the Netherlands’ raise-spending, raise-taxes approach. The U.K. and Italy enacted similarly-sized austerity packages, but Italy’s was half tax increases while the U.K. favored spending cuts. Neither country excelled, but over half of the gap between the U.K.’s 3 percent growth and Italy’s negative growth is explained by Italy’s tax increases.

By the way, it’s not as if Germany and the United Kingdom are stellar examples of fiscal restraint. It’s just that they’re doing better than nations that traveled down the path of even bigger government.

Regarding supposed Keynesian stimulus, Salim makes a very important point that more government spending seems positive in the short run, sort of like the fiscal version of a sugar high.

But that sugar high produces a bad hangover. Nations that try Keynesianism quickly fall behind countries with more prudent policy.

Government spending boosts GDP instantly and then crowds out private spending slowly. The incentive effects of taxation may take effect over several years, but they are permanent and especially pronounced in investment. If anything, this recent crisis shows how brief the short run is: Countries whose spending-focused stimulus put them one step ahead in 2010 were already two steps behind in 2012.

There’s a lot more in the report, so I encourage readers to give it a look.

I particularly like that it emphasizes the importance of properly defining “austerity” and “fiscal consolidation.” These are issues that I highlighted in my discussion with John Stossel.

Another great thing about the report is that it has all sorts of useful data.

Though much of it is depressing. Here’s Chart 2-9 from the report and it shows all the countries that have increased top marginal tax rates between 2007 and 2013.

Portugal wins the booby prize for the biggest tax hike, though many nations went down this class-warfare path. Including the United States thanks to Obama’s fiscal cliff tax increase.

The United Kingdom is an interesting case. It raised its top rate by 10 percentage points, but then cut the rate by 5 percentage points after it became apparent that the higher rate wasn’t collecting any additional revenue.

We should give credit to the handful of nations that have lowered tax rates, several of which replaced discriminatory systems with simple and fair flat taxes.

Though it’s also important to keep in mind where each nation started. Switzerland lowered it’s top rate by only 0.4 percentage points, which seems small compared to Denmark, which dropped its top rate by 6.7 percentage points.

But Switzerland started with a much lower rate, whereas Denmark has one of the world’s most punitive tax regimes (though, paradoxically, it is very laissez-faire in areas other than fiscal policy).

Let’s look at the same data, but from a different perspective. Chart 2-10 shows how many nations (from a list of 37) raised top rates or lowered top rates each year.

The good news is that tax cutters out-numbered tax-hikers in 2008 and 2009.

The bad news is that tax increases have dominated ever since 2010.

Many of these post-2009 tax hikes were enabled by a weakening of tax competition, which underscores why it is so important to preserve the right of jurisdictions to maintain competitive tax systems.

And don’t forget that tax policy will probably get even worse in the future because of aging populations and poorly designed entitlement programs.

Let’s close with some more numbers.

Here’s Table 2-5 from the report. It shows changes in the value-added tax (VAT) beginning in December 2008.

The key thing to notice is that there’s no column for decreases in the VAT. That’s because no nation lowered that levy. Practically speaking, this hidden form of a national sales tax is a money machine for bigger government.

But you don’t have to believe me. The International Monetary Fund unintentionally provided the data showing that VATs are the most effective tax for financing bigger government.

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Keynesian economics is a failure.

It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Japan in the 1990s. And it didn’t work for Bush or Obama in recent years.

No matter where’s it’s been tried, it’s been a flop.

So why, whenever there’s a downturn, do politicians resuscitate the idea that bigger government will “stimulate” the economy?

I’ve tried to answer that question.

Keynesian economics is the perpetual motion machine of the left. You build a model that assumes government spending is good for the economy and you assume that there are zero costs when the government diverts money from the private sector. …politicians love Keynesian theory because it tells them that their vice is a virtue. They’re not buying votes with other people’s money, they’re “stimulating” the economy!

I think there’s a lot of truth in that excerpt, but Sheldon Richman, writing for Reason, offers a more complete analysis. He starts by identifying the quandary.

You can’t watch a news program without hearing pundits analyze economic conditions in orthodox Keynesian terms, even if they don’t realize that’s what they’re doing. …What accounts for this staying power?

He then gives his answer, which is the same as mine.

I’d have said it’s because Keynesianism gives intellectual cover for what politicians would want to do anyway: borrow, spend, and create money. They did these things before Lord Keynes published his The General Theory of Employment, Interest, and Money in 1936, and they wanted to continue doing those things even when trouble came of it.

Makes sense, right?

But then Sheldon digs deeper, citing the work of Professor Larry White of George Mason University, and suggests that Keynesianism is popular because it provides hope for an easy answer.

Lawrence H. White of George Mason University, offers a different reason for this staying power in his instructive 2012 book The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years: namely, that Keynes’s alleged solution to the Great Depression offered hope, apparently unlike its alternatives. …White also notes that “Milton Friedman, looking back in a 1996 interview, essentially agreed [that the alternatives to Keynesianism promised only a better distant future]. Academic economists had flocked to Keynes because he offered a faster way out of the depression, as contrasted to the ‘gloomy’ prescription of [F.A.] Hayek and [Lionel] Robbins that we must wait for the economy to self-correct.” …Note that the concern was not with what would put the economy on a long-term sustainable path, but rather with what would give the short-term appearance of improvement.

In other words, Keynesian economics is like a magical weight-loss pill. Some people simply want to believe it works.

Which is understandably more attractive than the gloomy notion the economy has to go through a painful adjustment process.

But perhaps the best insight in Sheldon’s article is that painful adjustment processes wouldn’t be necessary if politicians didn’t make mistakes in the first place!

A related aspect of the Keynesian response to the Great Depression—this also carries on to the current day—is the stunning lack of interest in what causes hard times. Modern Keynesians such as Paul Krugman praise Keynes for not concerning himself with why the economy fell into depression in the first place. All that mattered was ending it. …White quotes Krugman, who faulted economists who “believed that the crucial thing was to explain the economy’s dynamics, to explain why booms are followed by busts.” …why would you want to get bogged down trying to understand what actually caused the mass unemployment? It’s not as though the cause could be expected to shed light on the remedy.

This is why it’s important to avoid unsustainable booms, such as the government-caused housing bubble and easy-money policy from last decade.

Hayek, Robbins, and Mises, in contrast to Keynes, could explain the initial downturn in terms of the malinvestment induced by the central bank’s creation of money and its low-interest-rate policies during the 1920s. …you’d want to see the mistaken investments liquidated so that ever-scarce resources could be realigned according to consumer demand… And you’d want the harmful government policies that set the boom-bust cycle in motion to end.

Gee, what a radical notion. Instead of putting your hope in a gimmicky weight-loss pill, simply avoid getting too heavy in the first place.

For further information, here’s my video on Keynesian economics.

P.S. Here’s some clever humor about Keynesian economics.

P.P.S. If you like humor, but also want some substance, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, this satirical commercial for Keynesian Christmas carols is right on the mark.

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The headline of this post might not be completely honest. Indeed, if you asked me to grade the accuracy of my title, I’ll admit right away that it falls into the “if you like your plan, you can keep your plan” category of mendacity.

Krugman WeatherBut I’m only prevaricating to set the stage for some satire about Keynesian economics.

But this satire is based on a very bizarre reality. Advocates of Keynesian economics such as Paul Krugman have claimed that war is stimulus for the economy and that it would be good if we were threatened by an alien invasion. As such, it doesn’t take too much imagination to think that conversations like this may have taken place inside the Obama White House.

Particularly since Keynes himself thought it would be good for growth if the government buried money in the ground.

So enjoy this satire from The Onion.

By the way, Krugman also said the 9-11 terrorist attacks would “do some economic good.”

So the folks at The Onion need to step it up if they want to keep pace.

Now let’s share a serious video.

I’ve written before about how the Food and Drug Administration’s risk-averse policies lead to needless deaths.

Econstories builds upon that hypothesis, using the Dallas Buyers Club to make excellent points about why markets are better than command-and-control regulation.

Very similar to what Steve Chapman wrote about bureaucracy, competency, and incentives.

By the way, the bureaucrats at the FDA also have engaged in pointless harassment of genetic testing companies, even though nobody claims there is even the tiniest shred of risk to health and safety.

And nobody will be surprised about the bureaucracy’s anti-smoking jihad.

But nothing exemplifies brainless bureaucracy more than the raid by the FDA’s milk police. Though the FDA’s strange condom regulations might be even more bizarre.

It’s hard to decide when bureaucracies do so many foolish things.

P.S. The prize for the craziest bit of red tape still belongs to Japan, where the government actually regulates providers of coffee enemas, though the Department of Agriculture’s rules for magic rabbits is a close competitor.

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It’s sometimes difficult to make fun of Keynesian economics. But this isn’t because Keynesian theory is airtight.

It’s easy, after all, to mock a school of thought that is predicated on the notion that you can make yourself richer by taking money from your right pocket and putting it in your left pocket.

The problem is that it’s hard to utilize satire when proponents of Keynesian theory say things that are more absurd than anything critics could possibly make up.

Paul Krugman, for example, stated a couple of years ago that it would be good for growth if everyone thought the world was going to be attacked by aliens because that would trigger massive military outlays.

He also asserted recently that a war would be very beneficial to the economy.

Equally bizarre, he really said that the terrorist attacks on the World Trade Center would “do some economic good” because of the subsequent money spent on rebuilding.

And let’s not forget that John Maynard Keynes actually did write that it would be good policy to bury money in the ground so that people would get paid to dig it out.

As you can see, it’s difficult to mock such a strange theory since proponents of Keynesianism already have given us such good material.

But let’s try.

Here’s an amusing satirical image of Ludwig von Mises describing Keynesian economics.

Here’s Paul Krugman doing a Keynesian weather report.

This is the one that got the biggest laugh from me, though I’m chagrined at the misspelling.

Keynesian Fire

Last but not least, here’s an image of a neighborhood that has been the recipient of lots of stimulus. I bet the people are very happy.

Sort of reminds me of this satirical Obama campaign poster.

Let’s close with a few serious observations.

I recently added my two cents to the debate in an article debunking the White House’s attempt to justify the failed 2009 stimulus.

And there’s lots of additional material here, here, and here. My favorite cartoon on Keynesian economics also is worth sharing.

But you’ll probably learn just as much and be more entertained by this video from the Atlas Economic Research Foundation. It looks at the left’s fascination with disaster economics.

And here’s my video debunking Keynesian theory.

I’ll end with a gloomy comment. It’s easy to mock Keynesian economics, but it’s very hard to put a stake through its heart.

How can you kill an idea that tells politicians that their vice – buying votes with other people’s money – is actually a virtue?

P.S. Here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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There’s an ongoing debate about Keynesian economics, stimulus spending, and various versions of fiscal austerity, and regular readers know I do everything possible to explain that you can promote added prosperity by reducing the burden of government spending.

Simply stated, we get more jobs, output, and growth when resources are allocated by competitive markets. But when resources are allocated by political forces, cronyism and pork cause inefficiency and waste.

That’s why statist nations languish and market-oriented countries flourish.

Paul Krugman has a different perspective on these issues, which is hardly a revelation. But I am surprised that he oftentimes doesn’t get the numbers quite right when he delves into specific case studies.

He claimed that spending cuts caused an Estonian economic downturn in 2008, but the government’s budget actually skyrocketed by 18 percent that year.

He complained about a “government pullback” in the United Kingdom even though the data show that government spending was climbing faster than inflation.

He even claimed that Hollande’s election in France was a revolt against austerity, notwithstanding the fact that the burden of government spending rose during the Sarkozy years.

My colleague Alan Reynolds pointed out that Krugman mischaracterized the supposed austerity in the PIIGS nations such as Portugal, Ireland, Italy, Greece, and Spain.

We have another example to add to the list.

He now wants us to believe that Germany has been a good Keynesian nation.

Here’s some of what Professor Krugman wrote for the New York Times.

I hear people trying to dismiss the overwhelming evidence for large economic damage from fiscal austerity by pointing to Germany: “You say that austerity hurts growth, but the Germans have done a lot of austerity and they’re booming.” Public service announcement: Never, ever make claims about a country’s economic policies (or actually anything about economics) on the basis of what you think you’ve heard people say. Yes, you often hear people talking about austerity, and the Germans are big on praising and demanding austerity. But have they actually imposed a lot of it on themselves? Not so much.

In some sense, I agree with Krugman. I don’t think the Germans have imposed much austerity.

But here’s the problem with his article. We know from the examples above that he’s complained about supposed austerity in places such as the United Kingdom and France, so one would think that the German government must have been more profligate with the public purse.

After all, Krugman wrote they haven’t “imposed a lot of [austerity] on themselves.”

So I followed the advice in Krugman’s “public service announcement.” I didn’t just repeat what people have said. I dug into the data to see what happened to government spending in various nations.

And I know you’ll be shocked to see that Krugman was wrong. The Germans have been more frugal (at least in the sense of increasing spending at the slowest rate) than nations that supposedly are guilty of “spending cuts.”

German Austerity Krugman

To ensure that I’m not guilty of cherry-picking the data, I look at three different base years. But it doesn’t matter whether we start before, during, or after the recession. Germany increased spending at the slowest rate.

Moreover, if you look at the IMF data, you’ll see that the Germans also were more frugal than the Swedes, the Belgium, the Dutch, and the Austrians.

So I’m not sure what Krugman is trying to tell us with his chart.

By the way, spending in Switzerland grew at roughly the same rate as it did in Germany. So if Professor Krugman is highlighting Germany as a role model, maybe we can take that as an indirect endorsement of Switzerland’s very good spending cap?

But I won’t hold my breath waiting for that endorsement to become official. After all, Switzerland has reduced the burden of government spending thanks to the spending cap.

Not exactly in line with Krugman’s ideological agenda.

P.S. This isn’t the first time I’ve had to deal with folks who mischaracterize German fiscal policy. When Professor Epstein and I debated a couple of Keynesians in NYC as part of the Intelligence Squared debate, one of our opponents asserted that Germany was a case study for Keynesian stimulus. But when I looked at the data, it turned out that he was prevaricating.

P.P.S. This post, I hasten to add, is not an endorsement of German fiscal policy. As I explained while correcting a mistake in the Washington Post, the burden of government is far too large in Germany. The only good thing I can say is that it hasn’t grown that rapidly in recent years.

P.P.P.S. Let’s close with a look at another example of Krugman’s misleading work. He recently implied that an economist from the Heritage Foundation was being dishonest in some austerity testimony, but I dug into the numbers and discovered that, “critics of Heritage are relying largely on speculative data about what politicians might (or might not) do in the future to imply that the Heritage economist was wrong in his presentation of what’s actually happened over the past six years”

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Did you sing Happy Birthday?

The nation just “celebrated” the fifth anniversary of the signing of the so-called American Recovery and Reinvestment Act, Political Cartoons by Nate Beelermore commonly referred to as the “stimulus.”

This experiment in Keynesian economics was controversial when it was enacted and it’s still controversial today.

The Obama Administration is telling us that the law was a big success, but I have a far more dour assessment of the President’s spending binge.

Here’s some of what I wrote about the topic for The Federalist.

The White House wants us to think the legislation was a success, publishing a report that claims the stimulus “saved or created about 6 million job-years” and “raised the level of GDP by between 2 and 3 percent from late 2009 through mid-2011.”

Sounds impressive, right?

Unfortunately, these numbers for jobs and growth are based on blackboard models that automatically assume rosy outcomes.

Here’s how I explain it in the article.

…how, pray tell, did the White House know what jobs and growth would have been in a hypothetical world with no stimulus? The simple answer is that they pulled numbers out of thin air based on economic models using Keynesian theory. …Keynesian economics is the perpetual motion machine of the left. They build models that assume government spending is good for the economy and they assume that there are zero costs when the government takes money from the private sector. That type of model then automatically generates predictions that bigger government will “stimulate’ growth and create jobs. The Keynesians are so confident in their approach that they’ll sometimes even admit that they don’t look at real world numbers. And that’s what the White House did in its estimate. The jobs number (or, to be more technical, the job-years number) is built into the model. It’s not a count of actual jobs.

In the real world, however, you can count jobs.

As part of my article, I looked at the Minneapolis Federal Reserve Bank’s interactive website and compared the current recovery to all business cycle expansions in the post-World War II era.

And I did that comparison for jobs and growth. Here are the numbers for the labor market. The current recovery is in red, and you can see that the nation is “stumbling through the second-worst recovery for job creation in the post-WWII era.”

Minn Fed Recovery Jobs Data

And here are the Minneapolis Fed’s numbers for growth.

It doesn’t seem possible, but GOP performance has been even worse than job performance. We are mired in stagnation. As I noted, “the current recovery (red line) is the weakest expansion since World War II.”

Minn Fed Recovery GDP Data

In other words, it’s very difficult to argue – looking at the numbers – that the President’s main economic initiative was a success.

So why did it flop?

I pontificate in the article, pointing out three specific problems with Keynesian economics. I start with the elementary observation that the theory is based on the notion that you can become richer by taking money out of one pocket and putting it in another pocket.

…there is an “opportunity cost” when government borrows money and spends it. Resources are diverted from the productive sector of the economy. This might not be a problem if government spent money wisely, but stimulus schemes tend to reward interest groups with the most political clout. So instead of outlays for physical and human capital, which at least theoretically might improve the economy’s productive capacity, the White House directed the bulk of the stimulus to redistribution programs and handouts to state governments.

I then make a critical observation about how you shouldn’t try to solve one set of bad government policies with another layer of bad policy.

…the Keynesians don’t seem to appreciate that recessions generally are the result of bad government policies – such as inflation, housing subsidies, etc – that lead to fundamental and unsustainable economic imbalances. Unfortunately, more government spending often is designed to prop up these imbalances, which can create a longer and more painful period of adjustment.

Political Cartoons by Eric AllieBut the clincher, at least for most people, is the simple fact that Keynesianism doesn’t work.

But the biggest problem with Keynesianism is that the real-world evidence is so unfriendly. Consider, for instance, that the White House claimed that the unemployment would never climb above 8 percent if the stimulus was adopted. The following chart shows the actual unemployment projection put together by the Obama Administration, but modified to show the actual monthly unemployment rates the country experienced. …And that’s just the tip of the stimulus iceberg. Keynesian economics has a long track record of failure. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Nixon, Ford, and Carter in the 1970s. It didn’t work for Japan in the 1990s. And it hasn’t worked this century for either Bush or Obama.

And guess what? I’m going to make a very sad prediction that we’ll get more Keynesian economics in the future, but it’s easy to predict right now that these future spending binges will fail just like previous stimulus schemes have flopped.

P.S. Here’s my video on Keynesian economics and here’s my video on Obama’s failed stimulus.

P.P.S. If you’d rather laugh than hear my voice, my favorite cartoons on Keynsianism can be viewed here and here.

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A just-released report from the bean counters at the Congressional Budget Office is getting lots of attention because the bureaucrats are now admitting that Obamacare will impose much more damage to the economy than they previously predicted.

Of course, many people knew from the start that Obamacare would be a disaster and that it would make the healthcare system even more dysfunctional, so CBO is way behind the curve.

Moreover, CBO’s deeply flawed estimates back in 2009 and 2010 helped grease the skids for passage of the President’s failed law, so I hardly think they deserve any applause for now producing more realistic numbers.

But today’s post isn’t about the Obamacare fiasco. I want to focus instead on some other numbers in the new CBO report.

The bureaucrats have put together their new 10-year “baseline” forecast of how much money the government will collect based on current tax laws and the latest economic predictions.

These numbers show that tax revenue is projected to increase by an average of 5.4 percent per year.

As many readers already know, I don’t fixate on balancing the budget. I care much more about reducing the burden of government spending and restoring the kind of limited government our Founding Fathers envisioned.

But whenever the CBO publishes new numbers, I can’t resist showing how simple it is to get rid of red ink by following my Golden Rule of fiscal restraint.

Here’s a chart showing projected revenue over the next 10 years, along with lines showing what happens if spending (currently $3.54 trillion) follows various growth paths.

Balancing the Budget Is Easy

The two biggest takeaways are that a spending freeze (similar to what we got in 2012 and 2013) would almost balance the budget in 2016 and would definitely produce a budget surplus in 2017.

I also highlight what would happen if politicians merely limited spending so it grew at the rate of inflation, about 2.3 percent per year. Under that scenario, the budget would be balanced in 2019 (actually a $20 billion surplus, but that’s an asterisk by Washington standards).

In other words, there is no need to raise taxes. It’s very simple to balance the budget without extracting more money from taxpayers.

This means the Simpson-Bowles people are wrong. The Domenici-Rivlin folks are wrong. Senator Patty Murray is wrong. Jeb Bush and Lindsey Graham are wrong. And (here’s a surprise) the Obama Administration is wrong.

And we have some additional evidence. It’s a chart taken directly from the CBO report and it shows that revenues over the next 10 years will be above the long-run average. This is because even weak growth slowly but surely produces more revenue for Washington, in part because it gradually pushes people into higher tax brackets.

CBO Above-Average Revenues

And this chart just looks at the next 10 yeas. If you peruse the long-run fiscal projections, you’ll see that the tax burden is projected to increase dramatically over the next several decades.

The moral of the story is that there should be tax cuts (ideally as part of tax reform), not tax increases.

P.S. Just in case you think I was being unfair in my description of the Congressional Budget Office, keep in mind that these are the bureaucrats who advise Congress that economic performance increases when taxes go up.

P.P.S. And even though CBO is finally admitting some of the flaws in Obamacare, the bureaucrats are still unrepentant Keynesians. Check out this excerpt from a story in yesterday’s Washington Post.

Rep. Chris Van Hollen (Md.), the top Democrat on the committee, cited the CBO’s finding that the law will “boost overall demand for goods and services over the next few years,” This is because people benefiting from its expansion of Medicaid and insurance subsidies will likely have extra money to spend, which “will in turn boost demand for labor over the next few years,” the report says.

So CBO would like us to believe that the more money the government redistributes, the more growth we’ll get. I guess this explains why France is such an economic dynamo.

More seriously, this is the same flawed analysis that allowed CBO to claim the so-called stimulus was creating jobs as employment was falling.

You can understand why I’ve written that Keynesian economics is the left’s perpetual motion machine.

P.P.P.S. Here’s a Center for Freedom and Prosperity video that I narrated back in 2010, which explains why it is simple to balance the budget. The numbers in the video obviously need to be replaced with the ones I shared above, but the analysis is still right on the mark.

P.P.P.P.S. And if you want to know how to achieve the modest spending restraint needed to balance the budget, the Swiss “debt brake” would be a good place to start.

It’s really a spending cap, and it’s worth noting that the Swiss budget has increased by only 2 percent per year since voters imposed the law back in 2001.

Or maybe we could somehow hope that politicians would simply be responsible, like lawmakers in Canada and New Zealand in the 1990s. Or we could reincarnate Reagan. Or even bring back Clinton.

P.P.P.P.P.S. Since we started this post by talking about how Obamacare is undermining the economy, let’s close with a great example of Obamacare humor.

Remember Pajama Boy? Well, he’s back for an encore performance thanks to some very clever people at Americans for Prosperity.

There’s no update, by the way, on whether being without a job impacts his chances of getting a date with Julia. They’d make such a good couple.

Pajama Boy Jobless

This is amusing, but it surely isn’t as funny as President Obama’s Chief Economist, who actually argued with a straight face that it was a good sign that Obamacare was leading people to drop out of the labor force because unemployment  “might be a better choice and a better option than what they had before.”

Sort of reminds me of this Chuck Asay cartoon, or this famous set of wagon cartoons.

Dependency for more and more people. Such an inviting concept…until this happens.

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Keynesian economics is the perpetual motion machine of the left. You build a model that assumes government spending is good for the economy and you assume that there are zero costs when the government diverts money from the private sector.

With that type of model, you then automatically generate predictions that bigger government will “stimulate’ growth and create jobs. Heck, sometimes you even admit that you don’t look at real world numbers.

Which perhaps explains why Keynesian economics has a long track record of failure. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Nixon, Ford, and Carter in the 1970s. It didn’t work for Japan in the 1990s. And it hasn’t worked this century for either Bush or Obama.

But politicians love Keynesian theory because it tells them that their vice is a virtue. They’re not buying votes with other people’s money, they’re “stimulating” the economy!

Given this background, you won’t be surprised to learn that Keynesians are now arguing that the recent partial government shutdown hurt growth.

Here’s some of what Standard and Poor’s wrote about that fight and why the shutdown supposedly reduced economic output, along with their warning of economic cataclysm if politicians had been forced to balance the budget in the absence of an increase in the debt ceiling.

…the shutdown has shaved at least 0.6% off of annualized fourth-quarter 2013 GDP growth, or taken $24 billion out of the economy. …the resulting sudden, unplanned contraction of current spending could see government spending cut by about 4% of annualized GDP. That would put the economy in a recession and wipeout much of the economic progress made by the recovery from the Great Recession. …The bottom line is the government shutdown has hurt the U.S. economy.

Part of me wonders whether the bottom line is that S&P was simply looking for an excuse for having made a flawed economic prediction earlier in the year. They basically admit they goofed (though, to be fair, all economists are lousy forecasters), as you can see from this excerpt, but we’re supposed to blame the lower GDP number on insufficient government spending.

In September, we expected 3% annualized growth in the fourth quarter… Since our forecast didn’t hold, we now have to lower our fourth-quarter growth estimate to closer to 2%.

Unsurprisingly, the Obama Administration has been highlighting S&P’s analysis.

A number of private sector analyses have estimated that the shutdown reduced the annualized growth rate of GDP in the fourth quarter by anywhere from 0.2 percentage point (as estimated by JP Morgan) to 0.6 percentage point (as estimated by Standard and Poor’s)… Most of the private sector analyses are based on models that predict the impact of the shutdown based on the reduction in government services over that period.

And the establishment press predictably carried water for the White House, echoing the S&P number. Here’s an example from Time magazine.

The financial services company said the shutdown, which ended with a deal late Wednesday night after 16 days, took $24 billion out of the U.S. economy, and reduced projected fourth-quarter GDP growth from 3 percent to 2.4 percent.

If nothing else, this is a good example of how a number gets concocted and becomes part of the public policy discussion.

Let’s take a step back,however, and analyze whether that $24 billion number has any merit.

The Keynesian interpretation is that the shutdown took money “out of the economy.” According to the theory, money apparently disappears if government doesn’t spend it.

In reality, though, less government spending means that more funds are available in credit markets for private spending. This video explains why Keynesian theory is misguided.

And if you want to dig further into the issue, you can click here for a video that explains why we might get better decisions if policy makers focused on how we earn income rather than how we allocate income.

Now that I’ve shared the basic arguments against Keynesian economics, let me give two caveats.

First, resources don’t get instantaneously reallocated when the burden of government spending is reduced. So I’ve always been willing to admit there could be a few speed bumps as some additional labor and capital get absorbed into the productive sector of the economy.

Second, a nation can artificially enjoy more consumption for a period of time by borrowing from overseas. So if deficit spending is financed to a degree by foreigners, overall spending in the economy will be higher and people will feel more prosperous.

But these caveats aren’t arguments for more spending. The ongoing damage of counterproductive government outlays is much larger and more serious than the transitory costs of redeploying resources when spending is reduced. And overseas borrowing at best creates illusory growth that will be more than offset when the bills come due.

Ultimately, the real-world evidence is probably the clincher for most people. As noted above, it’s hard to find a successful example of Keynesian spending.

Yet we have good evidence of nations growing faster when government outlays are being controlled, including Canada in the 1990s and the United States during both the Reagan years and Clinton years.

And the Baltic nations imposed genuine spending cuts and are now doing much better than other European countries that relied on either Keynesian spending or the tax-hike version of austerity.

P.S. Here’s a funny video on Keynesian Christmas carols. And everyone should watch the famous Hayek v Keynes rap video, as well as its equally clever sequel.

P.P.S. Switching to another topic, we have an encouraging update to the post I wrote last year about an Australian bureaucrat who won a court decision for employment compensation after injuring herself during sex while on an out-of-town trip. Showing some common sense, the Australian High Court just ruled 4-1 to strike down that award.

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It is reported that Henry Kissinger, commenting on the Iran-Iraq war, said something to the effect that, “Too bad both sides can’t lose.” I imagine lots of people felt the same way when two of the world’s worst murderers, Hitler and Stalin, went to war in 1941.

I have the same attitude about the fiscal fight in Europe. On one side, you have “austerity” proponents of higher taxes. On the other side, you have Keynesians who think a higher burden of government spending will produce growth.

Since I want lower spending and lower taxes, I have a hard time cheering for either group. As I say in this John Stossel interview, “there’s nobody in Europe who’s actually advancing that position that…the transfer of resources from the private sector to the government…is what hurts your economy.”*

But at least the fight is entertaining, especially since former allies at the International Monetary Fund and European Commission are now in a public spat.

Here are some blurbs from a New York Times report.

…tensions…have now burst into the open with an unusual bout of finger-pointing over policies that have pushed parts of Europe into an economic slump more severe than the Great Depression and left the Continent as a whole far short of even Japan’s anemic recovery. The blame game [was] initiated by a highly critical internal I.M.F. report released this week in Washington… Speaking Friday at an economic conference in his home country of Finland, Mr. Rehn, the usually phlegmatic commissioner of economic and monetary affairs, sounded like a put-upon spouse in a messy breakup. “I don’t think it’s fair and just for the I.M.F. to wash its hands and throw dirty water on the Europeans,” he said. He was responding to assertions by the I.M.F. that the European Commission, the union’s executive arm, had blocked proposals back in 2010 to make investors share more of the pain by writing down Greece’s debt and, more generally, had neglected the importance of structural reforms to lift Europe’s sluggish economy. Simon O’Connor, Mr. Rehn’s spokesman, said the report had made some valid points, but he derided as “plainly wrong and unfounded” a claim that the commission had not done enough to promote growth through reform.

The most accurate assessment is that neither the IMF nor the European Commission have done much to promote growth. But that’s not changing now that the IMF is migrating more toward the Keynesian camp (jumping out of the higher-tax frying pan into the higher-spending fire).

A “hands-off” approach would have been the right way for the IMF and European Commission to deal with the fiscal crisis in Greece and other nations. Without access to bailout funds and having lost access to credit markets, profligate governments would have been forced to immediately balance their budgets.

This wouldn’t necessarily have produced good policy since many of the governments would have raised taxes (which they did anyhow!), but a few nations in Southern Europe may have done the right thing by copying the Baltic nations and implementing genuine spending cuts.

Let’s finish up this post by speculating on what will happen next. I’m actually vaguely hopeful in the short run, largely because governments have exhausted all the bad policy options. It’s hard to imagine additional tax hikes at this stage. Heck, even the IMF has admitted that nations such as Greece are at the point on the Laffer Curve where revenues go down.

Moreover, many of these governments have slowed the growth of spending in the past couple of years, and if they can maintain even a modest bit of fiscal discipline over the next few years, that should boost growth by shrinking government spending as a share of economic output.

But continued spending restraint is vital. The burden of government spending is still far too high in the PIIGS nations, even when merely compared to pre-crisis spending levels.

P.S. Paul Krugman has been the main cheerleader for the spend-more Keynesian crowd, but he has an unfortunate habit of screwing up numbers, as you can see from his work on Estonia, the United KingdomFrance, and the PIIGS.

P.P.S. I’m not a fan of the euro, but Europe’s common currency shouldn’t be blamed for the mess in Europe.

P.P.P.S. You can read my thoughts here on the Rogoff-Reinhart kerfuffle, which deals with many of the same issues as this post.

*To be fair, there are a few policy experts who understand that Europe’s problem is excessive government spending. Even European voters seem to recognize that spending needs to be cut. The challenge is getting a corrupt political class to make good choices.

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I want a smaller burden of government spending, so you can only imagine how frustrating it is for me to observe the fight in Europe.

On one side of the debate you have pro-spenders, who call themselves “growth” advocates, but are really just Keynesians. On the other side of the debate, you have pro-taxers, who claim to favor “austerity,” but actually just want big government financed by taxes rather than borrowing.

I had a chance to condemn these statist policy prescriptions in an appearance on the John Stossel show.

Here are 10 takeaways from the discussion, along with links to further information.

  1. The main point of the interview was to explain that government spending hasn’t been cut in Europe, with the United Kingdom being a poster child for bad policy (you won’t be surprised that Paul Krugman hasn’t bothered to look at the actual numbers).
  2. Austerity in Europe generally is just a code word for higher taxes. Governments only restrain spending as a last resort.
  3. Excessive spending is the problem, but many people mistakenly fixate on government borrowing.
  4. Keynesian spending doesn’t work, regardless of when it’s been tried.
  5. The Baltic nations are a rare good example of how to respond to a crisis (and another example of Krugman misreading the data), though I should have mentioned that Switzerland never got in trouble in the first place because of its admirable fiscal policy.
  6. We also discussed some historical examples of good policy, such as fiscal restraint in Canada and New Zealand, as well as a shrinking burden of government spending during the Clinton years.
  7. At the end of the interview segment, I say the goal should be to reduce the size of government relative to the productive sector of the economy. I wasn’t narcissistic enough to say “Mitchell’s Golden Rule” on air, but I did say that good fiscal policy occurs when government grows slower than the private sector.
  8. In the Q&A section at the end, I talked about the economic impact of different forms of government spending. Politicians and other defenders of statism like to highlight capital spending, which can have positive effects, but they overlook the fact that the vast majority of government outlays are for things that hinder growth.
  9. Most important, I made the key point about poor people are much better off in pro-market, small-government jurisdictions such as Singapore and Hong Kong, where at least they have opportunity, rather than France or Italy, where the best they can hope for is permanent dependency.
  10. Last but not least, I express some optimism about the possibility of genuine entitlement reform, though I should have acknowledged that nothing good will happen while Obama is in office.

It’s always great to do a show with Stossel since he genuinely care about freedom and wants to explore the details. In previous appearances on his show, I’ve discussed dishonest fiscal policy in Washington, the differences between Texas and California, and the reverse Midas touch of government.

P.S. There is at least one person in Europe who understands the real problem is too much spending.

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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.

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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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.

NYT Austerity-Stimulus

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.

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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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.

Gump-GeithnerBut 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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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.

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.

Austerity in Europe

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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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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When the monthly job numbers are released, most people focus on the unemployment rate.

On many occasions, I’ve cited that number, usually to point out that the unemployment rate is far higher than the Obama Administration promised it would be if the so-called stimulus was enacted.

That episode should be additional proof that Keynesian economics is misguided.

But that’s not the issue we should be worrying about now. Instead, our concern should be what appears to be a permanent reduction in the share of the working-age population that is employed.

As I explain in this interview for Blaze TV, our ability to produce is governed by the quality and quantity of labor and capital in the economy. Unfortunately, it appears that the Bush-Obama policies of bigger government have had a negative impact.

To build upon that interview, here are the very latest numbers from the Bureau of Labor Statistics.

To be fair, the drop you see on the chart started before Obama took office. But he can be fairly blamed for the fact that there’s been no recovery.

Obama Jobs Legacy

The moral of the story is that bigger government is not a recipe for prosperity.

The burden of government spending is too high, the tax code is too punitive, red tape is hindering entrepreneurship, and various handouts are creating a dependency culture that discourages work.

Should we be surprised that the employment-population ratio is grim?

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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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Because I’ve been sharing good news recently – which definitely is not my normal style, I joked the other day I must be on coke, in love, or rolling in money. For example:

Well, the drugs, love, and money must still be in my system because I’m going to share some more good news. Our lords and masters in Washington have taken a small step in the direction of recognizing the Laffer Curve.

Here are some details from a Politico report.

Here’s one Republican victory that went virtually unnoticed in the slew of budget votes last week: The Senate told the Congressional Budget Office it should give more credit to the economic power of tax cuts. It won’t have the force of law, but it was a big symbolic win for conservatives — because it gave them badly needed moral support in an ongoing war to get Washington’s establishment number crunchers to take their economic ideas more seriously. The amendment endorsed a model called “dynamic scoring,” which assumes that tax cuts will pay for at least part of their cost by generating more economic activity. The measure by Sen. Rob Portman (R-Ohio) called on CBO and the Joint Committee on Taxation to include “macroeconomic feedback scoring” in all future estimates of tax legislation. …Portman eked out a narrow 51-48 victory in the final series of budget votes that started around 3 a.m. on Saturday.

Just in case you missed it, this modest victory for common sense took place in the Senate. You know, the place controlled by Harry Reid of Cowboy Poetry fame.Laffer Curve

To be sure, it’s not quite time to pop open the champagne.

The vote was a symbolic victory for the think tanks and lawmakers on the right who have been fighting for years to force CBO and JCT to officially endorse the idea that people spend more and invest more when they owe the government less. …Conservatives’ ideas, including revenue-generating tax cuts and a more market-oriented health care system, can only work if tax policy changes people’s behavior — and that’s just not how CBO views the world.

I’ve been very critical of both CBO and JCT, so I’m one of the people in “think tanks” the article is talking about.

P.S. Chuck Asay has a good cartoon mocking the CBO.

P.P.S. I’ll repeat, for the umpteenth time, that we want to recognize the insights of the Laffer Curve in order to facilitate lower tax rates, not because we want to maximize revenue for the government.

P.P.P.S. Dynamic scoring is a double-edged sword. If the statists control everything, they’ll use the process to justify more spending using discredited Keynesian economics.

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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.

Houston Chicago Guns Weather

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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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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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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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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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.

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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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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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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With Obama’s dismal record on jobs, there’s a lot of debate about how to improve the employment situation.

I take the pro-market position in this special report on Fox News.

The discussion focuses on the following questions.

In other words, there is no secret to job creation. Just get government out of the way.

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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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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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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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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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