I never watched That ’70s Show, but according to Wikipedia, the comedy program “addressed social issues of the 1970s.”
Assuming that’s true, they need a sequel that addresses economic issues of the 1970s. And the star of the program could be the Congressional Budget Office, a Capitol Hill bureaucracy that apparently still believes – notwithstanding all the evidence of recent decades – in the primitive Keynesian view that a larger burden of government spending is somehow good for economic growth and job creation.
I’ve previously written about CBO’s fairy-tale views on fiscal policy, but wondered whether a new GOP-appointed Director would make a difference. And I thought there were signs of progress in CBO’s recent analysis of the economic impact of Obamacare.
But the bureaucracy just released its estimates of what would happen if the spending caps in the Budget Control Act (BCA) were eviscerated to enable more federal spending. And CBO’s analysis was such a throwback to the 1970s that it should have been released by a guy in a leisure suit driving a Ford Pinto blaring disco music.
Here’s what the bureaucrats said would happen to spending if the BCA spending caps for 2016 and 2017 were eliminated.
According to CBO’s estimates, such an increase would raise total outlays above what is projected under current law by $53 billion in fiscal year 2016, $76 billion in fiscal year 2017, $30 billion in fiscal year 2018, and a cumulative $19 billion in later years.
And here’s CBO’s estimate of the economic impact of more Washington spending.
Over the course of calendar year 2016,…the spending changes would make real (inflation-adjusted) gross domestic product (GDP) 0.4 percent larger than projected under current law. They would also increase full-time-equivalent employment by 0.5 million. …the increase in federal spending would lead to more aggregate demand than under current law. …Over the course of calendar year 2017…CBO estimates that the spending changes would make real GDP 0.2 percent larger than projected under current law. They would also increase full-time-equivalent employment by 0.3 million.
Huh?
If Keynesian spending is so powerful and effective in theory, then why does it never work in reality? 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. Or Russia and China.
And if Keynesianism is right, then why did the economy do better after the sequester when the Obama Administration said that automatic spending cuts would dampen growth?
To be fair, maybe CBO wasn’t actually embracing Keynesian primitivism. Perhaps the bureaucrats were simply making the point that there might be an adjustment period in the economy as labor and capital get reallocated to more productive uses.
I’m open to this type of analysis, as I wrote back in 2012.
…there are cases where the economy does hit a short-run speed bump when the public sector is pruned. Simply stated, there will be transitional costs when the burden of public spending is reduced. Only in economics textbooks is it possible to seamlessly and immediately reallocate resources.
But CBO doesn’t base its estimates on short-run readjustment costs. The references to “aggregate demand” show the bureaucracy’s work is based on unalloyed Keynesianism.
But only in the short run.
CBO’s anti-empirical faith in the magical powers of Keynesianism in the short run is matched by a knee-jerk belief that government borrowing is the main threat to the economy’s long-run performance.
…the resulting increases in federal deficits would, in the longer term, make the nation’s output and income lower than they would be otherwise.
Sigh. Red ink isn’t a good thing, but CBO is very misguided about the importance of deficits compared to other variables.
After all, if deficits really drive the economy, that implies we could maximize growth with 100 percent tax rates (or, if the Joint Committee on Taxation has learned from its mistakes, by setting tax rates at the revenue-maximizing level).
This obviously isn’t true. What really matters for long-run prosperity is limiting the size and scope of government. Once the growth-maximizing size of government is determined, then lawmakers should seek to finance that public sector with a tax system that minimizes penalties on work, saving, investment, risk-taking, and entrepreneurship.
Remarkably, even international bureaucracies such as the World Bank and European Central Bank seem to understand that big government stifles prosperity. But I won’t hold my breath waiting for the 1970s-oriented CBO to catch up with 21st-century research.
P.S. Here’s some humor about Keynesian economics.
P.P.S. If you want to be informed and entertained, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally clever 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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The 70s Show addressed getting drunk, stoned, or laid, while trying to get through school. The social issues of the time were actually a little deeper than that. Sad that those people seem to be writing the history
I agree with your continual comments that spending is the main issue since of course without added spending their would be no need to tax or borrow more (though I disagree with your letting them play the game of basing it on % of GDP vs. forcing them to justify real $ spending increases, or real $ per capita spending).
However, while you admit red ink isn’t a good think, I think you tend to underestimate the “crowding out” impact of government borrowing (though admittedly the Fed confuses the issue at times when it does part of the borrowing). A $ lent to the federal government is a $ not invested in a private business. Private entities are riskier, but if government weren’t borrowing money investors wouldn’t stuff it into mattresses, they’d wind up more likely spending at least some of it on private investments. Recovery from a slow economy requires investment to modernize existing businesses, to provide new equipment and facilities to hire workers, as well as added investment in new businesses that drive much of the innovation that helps the economy continue to grow.
It seems possible that to achieve higher growth levels that a higher % of GDP will need to be spent on investment (everything from startup investment to facilities/equipment/training) than in the past, perhaps the easy innovations to increase productivity have been implemented and future ones require more investment. That is one added reason to try to get them to restrain government $ growth, and to not give in to the game, as you have, of focusing on government as a % of GDP which allows them to continue to grow government merely because GDP grows. By analogy just because someone’s salary goes up, that doesn’t require them to necessarily spend the same % of their budget on food, the same is true of government.
Bottom line, we are growing at 2% while the world grows by 4%.
American prosperity leadership is thus eroding fast, and Americans are quickly headed into the middle income world.
Id like to first start by saying those rap battles are some of the best videos on the internet. Also, I’d like to point out “moderation” is a key word to remember when approaching Keynesian ideologies. This isn’t just Adam Smith’s “Wealth of Nations”where countries must follow parameters to ensure import/export balance and proper competitive advantage. There are countless variables at play in the world economy and due to numerous bi-lateral trade agreements among other forms of interdependence, one could argue the deficit spending may not have a massive impact on the US. After all, for the time being the saying goes, “when the US sneezes the world catches a cold.” On another note, I agree with the previous comment, self-preservation plays a large part in governmental policies.
One must remember that only people act and normally they act in their own best interest.
Someone from the CBO recommending less government spending is in effect recommending that his own job be eliminated, based on the CBO’s poor forecasts. This is similar to agents within the IRS moving against those that wanted a simple tax code, since IRS jobs were at stake.
Another problem is that Keynesian analysis is the go-to method for calculating future events. There is no comparable method for estimating how much the “unseen” economy would improve if government spending were cut. Even if the individual believes that growth would occur, he would have to justify his seat-of-the-pants estimates to his superiors, who are all Keynesians.
Government employees, even though over-paid, are still not as well paid as those in financial markets, and are certainly not paid to take the risk of trying a new approach.