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.
- 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.
- 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.
- 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.
[…] down Memory Lane because of a rather insipid tweet from my occasional sparringpartner, Robert Reich. He wants his followers to think that inflation is caused by “corporate […]
[…] took that trip down Memory Lane because of a rather insipid tweet from my occasional sparring partner, Robert Reich. He wants his followers to think that inflation is caused by “corporate […]
[…] periodically post TV interviews and the second-most-watched segment – edged out only by my debate with Robert Reich on Keynesian economics – was when I discussed how President Obama’s statist policies are bad for young […]
[…] periodically post TV interviews and the second-most-watched segment – edged out only by my debate with Robert Reich on Keynesian economics – was when I discussed how President Obama’s statist policies are bad for young […]
[…] periodically post TV interviews and the second-most-watched segment – edged out only by my debate with Robert Reich on Keynesian economics – was when I discussed how President Obama’s statist policies are bad for young […]
[…] periodically post TV interviews and the second-most-watched segment – edged out only by my debate with Robert Reich on Keynesian economics – was when I discussed how President Obama’s statist policies are bad for young […]
Heads the Government and Friends Win, Tail Everyone Else Loses
It seems that no matter how you cut it the only winner in a government funded stimulus is the government and those who increase their supply of dollars through being recipients of this funding. Government and Friends: We will take a portion of your productive results and give some of it back to you as a stimulus as long as you pay us for giving some of your money back to you and continue to pay us for producing more opportunity for us to stimulate you. Whom does a government stimulus stimulate and what exactly does it stimulate?
Mr. Reich sure had a lot to say, he sounded very sure that he was confused. The more he said the more he had to say.
[…] periodically post TV interviews and the second-most-watched segment – edged out only by my debate with Robert Reich on Keynesian economics – was when I discussed how President Obama’s statist policies are bad for young […]
[…] and borrow or tax prudent and productive people to do it, whether we need it or not.” Debating Keynesian Economics with Robert Reich on CNN « International Liberty. Share this:TwitterRedditFacebookEmailPrintDiggStumbleUponLike this:LikeBe the first to like this. […]
The post World War II economic record is commonly misinterpreted to hide the truth, that lower government spending and greater economic freedom supported the US postwar boom.
The U.S. Postwar Miracle
11/04/10 – Economist David R. Henderson
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[edited] We often hear that big cuts in government spending over a short time are a bad idea. Keynesians argue first that large cuts in government spending, with no offsetting tax cuts, would lead to a large drop in aggregate demand for goods and services, thus causing a recession or even a depression.
Second, with a major shift in demand (fewer government goods and services and more private ones), Keynesians say that the economy will experience a wrenching readjustment, during which people will be unemployed and the economy will slow.
Yet, this scenario has already occurred in the United States, and the result was an astonishing boom. In the four years from 1944 to 1948, the U.S. government cut spending by 75% ($72 billion). It brought federal spending down from a peak of 44% of gross national product (GNP) in 1944 to only 8.9% in 1948, a drop of 35.1 percentage points.
The US economy did badly in the years preceding World War II. Why did it do so well in the years following the war? Dramatically reduced government spending and deregulation can take an economy from sickness to health. In short, one of the main things a government can do to help a weak economy recover is to step aside.
The biggest trigger to post-war growth was a sharp rise in private capital investment, which the war had all but halted. The New Deal had slowed investment, one reason the Great Depression lingered as long as it did. That investment jumped from $10.6 billion in 1945 to $46 billion in 1948, as plants expanded and retooled for the production of civilian goods.
Although the overall personal savings rate fell, the private investment rate soared from 5% to almost 18%, with the biggest leap coming in 1946, and reflected in GNP numbers only two years later. Business savings almost doubled in the same period, from $15.1 billion to $28 billion, financing expansion and hiring.
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Reich jumps over the question of why the private sector “holds back” in employment and spending to leap to his conclusion that more government spending is necessary no create economic growth.
It apparently hasn’t dawned on Reich that, maybe, his prescribed hyper-spending of trillions of dollars by the federal government alone might have something to do with the private sector holding back employing people and expanding.
Simply put, unless and until the private sector has some rational reason to hire people and expand (that is, businesses believe it will be profitable to do so), there will be no new employment and no new expansion. Regardless of how much government spends.
Interesting, too, that Reich credits World War II for the end of the Great Depression. I was taught in school Franklin D. Roosevelt’s economic policies, not WWII, ended the Depression.
Europe, orgy-like, destroyed its means of production as enemies’ air-raids decimated European factories everywhere while United States manufacturing, far beyond the reach of Axis air power, worked overtime producing the means of European destruction. But that didn’t have anything to do with our economic recovery.
Roosevelt’s hiring men to dig holes and hiring other men to fill them in, not war’s near-total waste of our economic competitors’ factories, shops, railroads, bridges, and roads, cured the USA’s economic woes, my generation was taught in public school.
Then again, in contrast to Obama’s stimulus which has produced nothing tangible recognizable even a few months out, Roosevelt left us the Blue Ridge Parkway and thousands of other Civilian Conservation Corps projects still useful and in service for our benefit 70 years later.
Go ‘Dogs!
Comment by Jim Campbell, Citizen Patriot
This was far from a debate but a planned hit job by CNN and their bubbly Erin Burnett well schooled in Keynesian economic theory, i.e. failed economic policy with the midget standing on the box getting the vast majority of the time.
Dan Mitchell is not a person light weights want to deal with, as Reich clearly is.
Bring on Professor Paul Krugman, Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times, all bastions for those who will never something so simple.
As they trot out their lexicon of tepid verbage they keep referring to “the government” providing the stimulus. Is there not one among these over educated clueless individuals that is capable of understanding a simple equation?
Government spending=taxpayer money used to prop up dubious programs, leaving $$ going to private sector to create more jobs, more products, and enlarging the tax base.
Take home message, increase the number of tax payers, instead of raising taxes. Case closed the defense rests. http://dancingczars.wordpress.com
It’s frustrating to watch people debate the effectiveness of a given stimulus when they don’t understand what a stimulus is supposed to accomplish, and especially when they are senior government officials and/or hold positions at fancy think tanks (sometimes they make things out to be far more complicated than they are).
A stimulus (whether tax cut or spending increase) neither ‘creates’ nor ‘increases’ jobs, at least not permanently. Rather, it attempts to put a stop to the private sector negativity that resulted a decrease in economic activity. Left unchecked, negativity results in even more negativity and an even greater decrease in economic activity.
Structured properly, a stimulus convinces employers and consumers that there is no need for them to cut even further back on employment, expansion and spending. If/when this happens, the economy’s natural optimism takes over and employers get back to hiring and consumers resume their spending.
With this in mind, we can evaluate the (lack of) success of the Obama stimulus. Rather than reassure people, the size and structure of the stimulus (along with Obama’s other anti-business policies) made us even more worried about the future. Thus, and quite rationally, we haven’t resumed our hiring, expansion or spending (there’s a reason companies are sitting on record amounts of cash).
And this is why growing the public sector any further won’t work. Adding another gazillion federal workers isn’t going to lead to the private sector adding factories, offices and hiring more workers… for the same reason…. namely, that adding all this federal spending is only accelerate the day on which the whole system comes crashing down.
As a side note, Reich is correct that WWII was a successful stimulus, but not for the reason he thinks. It wasn’t the spending per se that reassured America that all was going to be okay, but rather that the spending went to weapons that we figured would win us the war. And there’s nothing that boosts one’s confidence as winning a war that one thought there was a chance of losing (this explains why Bush I’s success in Kuwait didn’t goose the economy to any great degree… no one really thought we were going to lose, so winning didn’t lead to much of a boost in national confidence).
Thank you for your emphasis on Estonia.
Funny that Reich should complain that the private sector is not hiring and investing, without wondering what can be done to cajole them into hiring and investing.
Of course, when Reich says that “we” have to cut spending “in the long term”, he is a more orthodox Keynesian than Krugman. The way I see it, IF Keynesian stimuli work at all (a Big IF), they work only when public debt is close to zero and public spending is low to start with, and then only if the country has AAA credit rating (which the Baltics do not yet have).
BTW neither Singapore nor Switzerland have a public debt close to zero.
Ted Barnhart, you make an excellent point about the wealth/life destruction. And rightthoughts I would pay actual money to sit in on that conversation.
Sorry Dan, I have nothing to add to your points except again, “Yeah, what he said is correct.”
rightthouhgts…hilarious, that would be the ultimate “teachable moment.”
Good stuff. The Obama campaign is conducting a contest for someone to have dinner with the President and be able to invite the “celebrity” of their choice. If it didn’t cost $3 I’d enter in the hope to win and invite Thomas Sowell to the dinner. What an image, Obama being schooled in economics by Mr. Sowell.
Great video, worth taking the 7 minutes if you can spare them. A few thoughts:
1) A side note, but Erin Burnett was light years better than she ever was on CNBC. I will make it a point to check out her show.
2) Despite the fact that I am at the opposite end of the philosophical spectrum from Dr. Reich, I have always liked him, quite a bit actually.
3) As for the notion that WW II was a Keynsian end to the Depression: Sure, it goosed GDP, but it the Keynsian War destroyed wealth (not to mention lives), not created it.
Then when it was all over we got to rebuild Europe. How could we not have thrived in the post war era, regardless of what tax rates were.
We could initiate a massive program to break every window in the U.S. and employ people to fix them. GDP would increase, but we would actually be worse off for having squandered all the resources, just to get back to where we originally were.