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Archive for the ‘Keynesian’ Category

Keynesian economics is like Freddie Krueger, constantly reappearing after logical people assumed it was dead. The fact that various stimulus schemes inevitably fail should be the death knell for the theory, which is basically the “perpetual motion machine” of economics. Indeed, I’ve wondered whether we’ve reached the point where the “debilitating drug” of Keynesianism has “jumped the shark.”

Yet Keynesian economics has “perplexing durability,” probably because the theory tells politicians that their vice of profligacy is actually a virtue.

But there are some economists who genuinely seem to believe that government can artificially boost growth. They claim terrorist attacks and alien attacks can be good for growth if they lead to more spending. They even think natural disasters are good for the economy.

I’m not joking. As reported by CNBC, the President of the New York Federal Reserve actually thinks the economy is stimulated when wealth is destroyed.

Hurricanes Harvey and Irma actually will lead to increased economic activity over the long run, New York Fed President William Dudley said in an interview. …”The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.”

I’m always stunned when sentient adults make this kind of statement.

Should we invite ISIS into the country to blow up some bridges? Should we dynamite new buildings? Should we pray for an earthquake to destroy a big city? Should we have a war, featuring lots of spending and destruction?

All of those things, along with hurricanes and floods, are good for growth according to Keynesian theory.

Jeff Jacoby explains why this is poisonous economic analysis.

Could anything be more absurd? The shattering losses caused by hurricanes, earthquakes, forest fires, and other calamities are grievous misfortunes that obviously leave society poorer. Vast sums of money may be spent afterward to repair and rebuild, but society will still be poorer from the damage caused by the storm or other disaster. Every dollar spent on cleanup and reconstruction is a dollar that could have been spent to enlarge the nation’s reservoir of material assets. Instead, it has to be spent replacing what was lost. …No, hurricanes are not good for the economy. Neither are floods, earthquakes, or massacres. When windows are shattered, all of humanity is left materially worse off. There is no financial “glint of silver lining.” To claim otherwise is delusional.

By the way, I don’t think any Keynesians actually want disasters to happen.

They’re simply making a “silver lining” argument that a bad event will lead to more spending. In their world, what drives the economy is consumption, and it’s the role of government to either consume directly or to give money to people so they will spend it.

In a recent interview, I pointed out that investment and production are the real keys to growth (which is why I prefer GDI over GDP). Increased consumption, I explained, is a result of growth, not the cause of growth.

You’ll notice I also threw in a jab at the state and local tax deduction, a loophole that needs to be abolished as part of tax reform.

But let’s not get sidetracked.

For those who want to do some additional reading on Keynesian economics, I recommend this new study by a couple of professors. Here’s a blurb from the abstract.

…Keynesians assert that even wasteful government spending can be desirable because any spending is better than nothing. This simple Keynesian approach fails to account, however, for several significant sources of cost. In addition to the cost of waste inherent in government spending, financing that spending requires taxation, which entails an excess burden. Furthermore, the employment of even previously idle resources involves opportunity costs.

I’ll close by augmenting theory and academic analysis with some real-world observations. Keynesian economics didn’t work for Hoover and Roosevelt, hasn’t worked for Japan, didn’t work for Obama, and didn’t work in Australia. Indeed, Keynesians can’t point to a single success story anywhere in the world at any point in history.

Though they always have an excuse. The government should have spent more, they tell us.

P.S. Since their lavish tax-free salaries are dependent on pleasing the governments that finance their budgets, international bureaucrats try to justify Keynesian economics. Here’s some recent economic alchemy from the IMF and OECD.

P.P.S. I frequently urge people to watch my video debunking Keynesian economics. Though I admit it’s not nearly as entertaining as the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable 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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To be blunt, Republicans are heading in the wrong direction on fiscal policy. They have full control of the executive and legislative branches, but instead of using their power to promote Reaganomics, it looks like we’re getting a reincarnation of the big-government Bush years.

As Yogi Berra might have said, “it’s deja vu all over again.”

Let’s look at the evidence. According to the Hill, the Keynesian virus has infected GOP thinking on tax cuts.

Republicans are debating whether parts of their tax-reform package should be retroactive in order to boost the economy by quickly putting more money in people’s wallets.

That is nonsense. Just as giving people a check and calling it “stimulus” didn’t help the economy under Obama, giving people a check and calling it a tax cut won’t help the economy under Trump.

Tax cuts boost growth when they reduce the marginal tax rate on productive behavior such as work, saving, investment, or entrepreneurship. When that happens, people have an incentive to generate more income. And that leads to more national income, a.k.a., economic growth.

Borrowing money from the economy’s left pocket and then stuffing checks (oops, I mean retroactive tax cuts) in the economy’s right pocket, by contrast, simply reallocates national income.

Indeed, this is one of the reasons why the economy didn’t get much benefit from the 2001 Bush tax cut, especially when compared to the growth-oriented 2003 tax cut. Unfortunately, Republicans haven’t learned that lesson.

Republicans have taken steps in the past to ensure that taxpayers directly felt the benefits of tax cuts. As part of the 2001 tax cuts enacted by President George W. Bush, taxpayers received rebate checks.

The article does include some analysis from people who understand that retroactive tax cuts aren’t economically beneficial.

…there are also drawbacks to making tax changes retroactive. …such changes would add to the cost of the bill, but would not be an effective way to encourage new spending and investments. “It has all of the costs of the tax cuts but none of the economic benefits,” said Committee for a Responsible Federal Budget President Maya MacGuineas, who added that “you don’t make investments in the rear-view mirror.”

I’m not always on the same side as Maya, but she’s right on this issue. You can’t encourage people to generate more income in the past. If you want more growth, you have to reduce marginal tax rates on future activity.

By the way, I’m not arguing that there is no political benefit to retroactive tax cuts. If Republicans simply stated that they were going to send rebate checks to curry favor with voters, I’d roll my eyes and shrug my shoulders.

But when they make Keynesian arguments to justify such a policy, I can’t help but get upset about the economic illiteracy.

Speaking of bad economic policy, GOPers also are pursuing bad spending policy.

Politico has a report on a potential budget deal where everyone wins…except taxpayers.

The White House is pushing a deal on Capitol Hill to head off a government shutdown that would lift strict spending caps long opposed by Democrats in exchange for money for President Donald Trump’s border wall with Mexico, multiple sources said.

So much for Trump’s promise to get tough on the budget, even if it meant a shutdown.

Instead, the back-room negotiations are leading to more spending for all interest groups.

Marc Short, the White House’s director of legislative affairs, …also lobbied for a big budget increase for the Pentagon, another priority for Trump. …The White House is offering Democrats more funding for their own pet projects.

The only good news is that Democrats are so upset about the symbolism of the fence that they may not go for the deal.

Democrats show no sign of yielding on the issue. They have already blocked the project once.

Unfortunately, I expect this is just posturing. When the dust settles, I expect the desire for more spending (from both parties) will produce a deal that is bad news. At least for those of us who don’t want America to become Greece (any faster than already scheduled).

Republican and Democratic congressional aides have predicted for months that both sides will come together on a spending agreement to raise spending caps for the Pentagon as well as for nondefense domestic programs.

So let’s check our scorecard. On the tax side of the equation, we’ll hopefully still get some good policy, such as a lower corporate tax rate, but it probably will be accompanied by some gimmicky Keynesian policy.

On the spending side of the equation, it appears my fears about Trump may have been correct and he’s going to be a typical big-government Republican.

It’s possible, of course, that I’m being needlessly pessimistic and we’ll get the kinds of policies I fantasized about in early 2016. But I wouldn’t bet money on a positive outcome.

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While it’s quite clear that the establishment media leans to the left, I don’t get too agitated about bias. Though every so often I can’t resist the temptation to comment when I come across egregious examples on issues such as poverty, guns, Greece, jobs, taxes, and education.

The bias extends to politics, of course, though the only time I felt compelled to comment was when ABC News rushed to imply that the Tea Party somehow was connected to a mass shooting in Colorado.

Well, I now feel compelled to comment again. But this example goes beyond bias and should be characterized as blatant and disgusting dishonesty. The hacks at Time took a quote from Charles Koch and then used selective editing to completely misrepresent what he actually said.

In a just world, the person who engaged in this bit of mendacity would lose his or her job and never again work in journalism. But I would hold my breath waiting for that to happen.

But let’s set aside the issue of media bias and dishonesty.

I want to highlight what Mr. Koch said about GDP. He expressed skepticism of that measure because it doesn’t distinguish between good expenditures and bad expenditures.

That’s one of the reasons why I prefer gross domestic income instead of gross domestic product. In simple terms, GDI measures how our national income is generated and GDP measures how it is allocated.

As the Bureau of Economic Analysis explains, the two numbers are basically different sides of the same coin.

In national economic accounting, GDP and GDI are conceptually equal. GDP measures overall economic activity by final expenditures, and GDI measures it by the incomes generated from producing GDP. In practice, GDP and GDI differ because they are constructed using different sources of information. …when one looks at annual data – where the timing differences are less important, the correlation between GDP and GDI is 0.97.

That correlation shouldn’t be a surprise. Indeed, over a longer period of time, the two numbers should be identical.

Both go up when the economy is doing well, and both go down when there is a recession.

But I want to make a more subtle point.

The reason I like GDI over GDP is because one the former is more likely to lead people to support good policy while the latter is more likely to lead people in the direction of bad policy.

Here’s some of what I wrote on the topic back in 2013.

GDP numbers only measure how we spend or allocate our national income. It’s a very 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. …We should be focusing on how to increase national income, not what share of it is being redistributed by politicians.

And, on a related note, you can back to 2009 for a column I wrote explaining that consumer spending is a reflection of a strong economy, not the cause of a  strong economy.

And this video ties everything together by debunking the Keynesian argument that politicians should focus on goosing consumer spending.

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Keynesian economics is fundamentally misguided because it focuses on how to encourage more spending when the real goal should be to figure out policies that result in more income.

This is one of the reasons I wish people focused more on “gross domestic income,” which is a measure of how we earn our national income (i.e., wages, small business income, corporate profits, etc) rather than on “gross domestic product,” which is a measure of how our national income gets allocated (consumption, investment, government, etc).

Simply stated, Keynesians put the cart before the horse. Consumption doesn’t drive growth, it’s a consequence of growth.

But let’s set all that aside because we have new evidence that Keynesian stimulus schemes aren’t even very good at artificially goosing consumption.

Three economists (from MIT and Tex A&M) have crunched the numbers and discovered that Obama’s Cash-for-Clunkers scheme back in 2009 was a failure even by Keynesian standards.

The abstract of the study tells you everything you need to know.

The 2009 Cash for Clunkers program aimed to stimulate consumer spending in the new automobile industry, which was experiencing disproportionate reductions in demand and employment during the Great Recession. Exploiting program eligibility criteria in a regression discontinuity design, we show nearly 60 percent of the subsidies went to households who would have purchased during the two-month program anyway; the rest accelerated sales by no more than eight months. Moreover, the program’s fuel efficiency restrictions shifted purchases toward vehicles that cost on average $5,000 less. On net, Cash for Clunkers significantly reduced total new vehicle spending over the ten month period.

This is remarkable. At the time, the most obvious criticism of the scheme was that it would simply alter the timing of purchases.

And scholars the following year confirmed that the program didn’t have any long-run impact.

But now we find out that there was impact, but it was negative. Here’s the most relevant graph from the study.

It shows actual vehicle spending and estimated spending in the absence of the program.

For readers who like wonky details, here’s the explanatory text for Figure 7 from the study.

The effect of the program on cumulative new vehicle spending by CfC-eligible households is shown in Figure 7. The figure shows actual spending and estimates of counterfactual spending if there had been no CfC program. Cumulative spending under the CfC program was larger than counterfactual spending for the months immediately after the program. However, by February 1 the counterfactual expenditures becomes larger and by April has grown to be $4.0 billion more than actual expenditures under the program. It is difficult to make the case that the brief acceleration in spending justifies the loss of $4.0 billion in revenues to the auto industry, for two reasons. First, we calculate that in order to justify the estimated longer-term reduction in cumulative spending to boost spending for a few months, one would need a discount rate of 208 percent. Given the expected (and realized) duration of the recession, it seems difficult to argue in favor of such a discount rate. Second, we note that Cash for Clunkers seems especially unattractive compared to a counterfactual stimulus policy that left out the environmental component, which also would have accelerated purchases for some households without reducing longer-term spending.

By the way, the authors point out that Cash-for-Clunkers wasn’t even good environmental policy.

One could also argue that this decline in industry revenue over less than a year could be justified to the extent the program offered a cost-effective environmental benefit. Unfortunately, the existing evidence overwhelmingly indicates that this program was a costly way of reducing environmental damage. For example, Knittel [2009] estimates that the most optimistic implied cost of carbon reduced by the program is $237 per ton, while Li et al. [2013] estimate the cost per ton as between $92 and $288. These implied cost of carbon figures are much larger than the social costs of carbon of $33 per ton (in 2007 dollars) estimated by the IWG on the Social Cost of Carbon [Interagency Working Group, 2013].

So let’s see where we stand. The program was bad fiscal policy, bad economic policy, and bad environmental policy.

The trifecta of Obamanomics. No wonder the United States suffered the weakest recovery of the post-WWII era.

P.S. David Letterman had a rather amusing cash-for-clunkers joke back in 2010.

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Time for an update on the perpetual motion machine of Keynesian economics.

We’ll start with the good news. The Treasury Department commissioned a study on the efficacy of the so-called stimulus spending that took place at the end of last decade. As discussed in this news report, the results were negative.

…a scathing new Treasury-commissioned report…argues the cash splash actually weakened the economy and damaged local industry… The report, …says the…fiscal stimulus was “unnecessarily large” and “misconceived because it emphasised transfers, unproductive expenditure…rather than tax relief and/or supply side reform”.

The bad news, at least from an American perspective, is that it was this story isn’t about the United States. It’s a story from an Australian newspaper about a study by an Australian professor about the Keynesian spending binge in Australia that was enacted back in 2008 and 2009.

I actually gave my assessment of the plan back in 2010, and I even provided my highly sophisticated analysis at no charge.

The Treasury-commissioned report, by contrast, presumably wasn’t free. The taxpayers of Australia probably coughed up tens of thousands of dollars for the study.

But this is a rare case where they may benefit, at least if policy makers read the findings and draw the appropriate conclusions.

Here are some of the highlights that caught my eye, starting with a description of what the Australian government actually did.

The GFC fiscal stimulus involved a mix of new public expenditure on school buildings, social housing, home insulation, limited tax breaks for business, and income transfers to select groups. Stimulus packages were announced and implemented in the December 2008, March 2009 quarters and ran into subsequent quarters.

For what it’s worth, there are strong parallels between what happened in the U.S. and Australia.v

Both nations had modest-sized Keynesian packages in 2008, followed by larger plans in 2009. The total American “stimulus” was larger because of a larger population and larger economy, of course, and the political situation was also different since it was one government that did the two plans in Australia compared to two governments (Bush in 2008 and Obama in 2009) imposing Keynesianism in the United States.

Here’s a table from the report, showing how the money was (mis)spent in Australia.

Now let’s look at the economic impact. We know Keynesianism didn’t work very well in the United States.

And the report suggests it didn’t work any better in Australia.

…fiscal stimulus induced foreign investors to take up newly issued relatively high yielding government bonds whose AAA credit rating further enhanced their appeal. This contributed to exchange rate appreciation and a subsequent competitiveness… Worsened competitiveness in turn reduced the viability of substantial parts of manufacturing, including the motor vehicle sector. …Government spending continued to rise as a proportion of GDP… This put upward pressure on interest rates… this worsened industry competitiveness contributed to major job losses, not gains, in manufacturing and tourism. …In sum, fiscal stimulus was not primarily responsible for saving the Australian economy… Fiscal stimulus later weakened the economy.

Though there was one area where the Keynesian policies had a significant impact.

Australia’s public debt growth post GFC ranks amongst the highest in the G20. Ongoing budget deficits and rising public debt have contributed to economic weakness in numerous ways. …Interest paid by the federal government on its outstanding debt was under $4 billion before the GFC yet could reach $20 billion, or one per cent of GDP, by the end of the decade.

We got a similar result in America. Lots more red ink.

Except our debt started higher and grew by more, so we face a more difficult future (especially since Australia is much less threatened by demographics thanks to a system of private retirement savings).

The study also makes a very good point about the different types of austerity.

…a distinction can be made between “good” and “bad” fiscal consolidation in terms of its macroeconomic impact. Good fiscal repair involves cutting unproductive government spending, including program overlap between different tiers of government. On the contrary, bad fiscal repair involves cutting productive infrastructure spending, or raising taxes that distort incentives to save and invest.

Incidentally, the report noted that the Kiwis implemented a “good” set of policies.

…in New Zealand…marginal income tax rates were reduced, infrastructure was improved and the regulatory burden on business was lowered.

Yet another reason to like New Zealand.

Let’s close by comparing the burden of government spending in the United States and Australia. Using the OECD’s dataset, you see that the Aussies are actually slightly better than the United States.

By the way, it looks like America had a bigger relative spending increase at the end of last decade, but keep in mind that these numbers are relative to economic output. And since Australia only had a minor downturn while the US suffered a somewhat serious recession, that makes the American numbers appear more volatile even if spending is rising at the same nominal rate.

P.S. The U.S. numbers improved significantly between 2009 and 2014 because of a de facto spending freeze. If we did the same thing again today, the budget would be balanced in 2021.

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I’m glad that Donald Trump wants faster growth. The American people shouldn’t have to settle for the kind of anemic economic performance that the nation endured during the Obama years.

But does he understand the right recipe for prosperity?

That’s an open question. At times, Trump makes Obama-style arguments about the Keynesian elixir of government infrastructure spending. But at other times, he talks about lowering taxes and reducing the burden of red tape.

I don’t know what’s he’s ultimately going to decide, but, as the late Yogi Berra might say, the debate over “stimulus” is deja vu all over again. Supporters of Keynesianism (a.k.a., the economic version of a perpetual motion machine) want us to believe that government can make the country more prosperous with a borrow-and-spend agenda.

At the risk of understatement, I disagree with that free-lunch ideology. And I discussed this issue in a recent France24 appearance. I was on via satellite, so there was an awkward delay in my responses, but I hopefully made clear that real stimulus is generated by policies that make government smaller and unleash the private sector.

If you want background data on labor-force participation and younger workers, click here. And if you want more information about unions and public policy, click here.

For today, though, I want to focus on Keynesian economics and the best way to “stimulate” growth.

The question I always ask my Keynesian friends is to provide a success story. I don’t even ask for a bunch of good examples (like I provide when explaining how spending restraint yields good results). All I ask is that they show one nation, anywhere in the world, at any point in history, where the borrow-and-spend approach produced a good economy.

Simply stated, there are success stories. And the reason they don’t exist is because Keynesian economics doesn’t work.

Though the Keynesians invariably respond with the rather lame argument that their spending schemes mitigated bad outcomes. And they even assert that good outcomes would have been achieved if only there was even more spending.

All this is based, by the way, on Keynesian models that are designed to show that more spending generates growth. I’m not joking. That’s literally their idea of evidence.

Since you’re probably laughing after reading that, let’s close with a bit of explicit Keynesian-themed humor.

I’ve always thought this Scott Stantis cartoon best captures why Keynesian economics is misguided. Simply stated, it’s silly to think that the private sector is going to perform better if politicians are increasing the burden of government spending.

But I’m also amused by cartoons that expose the fact that Keynesian economics is based on the notion that you can become richer by redistributing money within an economy. Sort of like taking money out of your right pocket and putting it in your left pocket and thinking that you now have more money.

Expanding on this theme, here’s a new addition for our collection of Keynesian humor. It’s courtesy of Don Boudreaux at Cafe Hayek, and it shows the Keynesian plan to charge the economy (pun intended). You don’t need to know a lot about electricity to realize this isn’t a very practical approach.

Is this an unfair jab? Maybe, but don’t forget that Keynesians are the folks who think it’s good for growth to pay people to dig holes and then pay them to fill the holes. Or, in Krugman’s case, to hope for alien attacks. No wonder it’s so easy to mock them.

P.S. If you want to learn more about Keynesian economics, the video I narrated for the Center for Freedom and Prosperity is a good place to start.

P.P.S. And if you like Keynesian videos, 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 no longer the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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In the world of fiscal policy, there are actually two big debates.

  1. One debate revolves around the appropriate size of government in the long run. Folks on the left argue that government spending generates a lot of value and that bigger government is a recipe for more prosperity. Libertarians and their allies, by contrast, point out that most forms of government spending are counterproductive and that large public sectors (and the accompanying taxes) undermine economic performance.
  2. The other debate is focused on short-run economic effects, and revolves around the “Keynesian” argument that more government spending is a “stimulus” to a weak economy and that budget-cutting “austerity” hurts growth. Libertarians and other critics are generally skeptical that government spending boosts short-run growth and instead argue that the right kind of austerity (i.e., a lower burden of government spending) is the appropriate approach.

Back in 2009 and 2010, I wrote a lot about the Keynesian stimulus fight. In more recent years, however, I have focused more on the debate over the growth-maximizing size of government.

But it’s time to revisit the stimulus/austerity debate. The National Bureau of Economic Research last month released a new study by five economists (two from Harvard, one from NYU, and two from Italian universities) reviewing the real-world evidence on fiscal consolidation (i.e., reducing red ink) over the past several decades.

This paper studies whether what matters most is the “when” (whether an adjustment is carried out during an expansion, or a recession) or the “how” (i.e. the composition of the adjustment, whether it is mostly based on tax increases, or on spending cuts). …We estimate a model which allows for both sources of non-linearity: “when” and “how”.

Here’s a bit more about the methodology.

The fiscal consolidations we study are those implemented by 16 OECD countries (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Portugal, Spain, Sweden, United Kingdom, United States) between 1981 and 2014. …We also decompose each adjustment in its two components: changes in taxes and in spending. …we use a specification in which the economy, following the shift in fiscal policy, can move from one state to another. We also allow multipliers to vary depending on the type of consolidation, tax-based vs expenditure-based. …Our government expenditure variable is total government spending net of interest payments on the debt: that is we do not distinguish between government consumption, government investment, transfers (social security benefits etc) and other government outlays. …In total we have 170 plans and 216 episodes, of which about two-thirds are EB and one-third are TB.

By the way, “EB” refers to “expenditure based” fiscal consolidations and “TB” refers to “tax based” consolidations.

And you can see from Table 5 that some countries focused more on tax increases and others were more focused on trying to restrain spending.

Congratulations to Canada and Sweden for mostly or totally eschewing tax hikes.

Though I wonder how many of the 113 “EB” plans involved genuine spending reforms (probably very few based on this data) and how many were based on the fake-spending-cuts approach that is common in the United States.

But I’m digressing.

Let’s now look at some findings from the NBER study, starting with the fact that most consolidations took place during downturns, which certainly wouldn’t please Keynesians, but shouldn’t be too surprising since red ink tend to rise during such periods.

…there is a relation between the timing and the type of fiscal adjustment and the state of the economy. Overall, adjustment plans are much more likely to be introduced during a recession. There was a consolidation in 62 out of 99 years of recession…, while we record a consolidation in only 13 over 94 years of expansion. …it is somewhat surprising that a majority of the shifts in fiscal policy devoted to reducing deficits are implemented during recessions.

And here are the results that really matter. The economists crunched the numbers and found that tax increases impose considerable damage, whereas spending cuts cause very little harm to short-run performance.

We find that the composition of fiscal adjustments is more important than the state of the cycle in determining their effect on output. Fiscal adjustments based upon spending cuts are much less costly in terms of short run output losses – such losses are in fact on average close to zero – than those based upon tax increases which are associated with large and prolonged recessions regardless of whether the adjustment starts in a recession or not. …what matters for the short run output cost of fiscal consolidations is the composition of the adjustment. Tax-based adjustments are costly in terms of output losses. Expenditure-based ones have on average very low costs.

These findings are remarkable. Even I’m willing to accept that spending cuts may be painful in the short run (not because of Keynesian reasons, but simply because resources don’t instantaneously get reallocated to more productive uses).

So if the economists who wrote this comprehensive study find that there is very little short-run dislocation associated with spending cuts, that’s powerful evidence.

And when you then consider all the data and research showing the positive long-run effects of smaller government, this certainly suggests that the top fiscal priority should be shrinking the size and scope of government.

P.S. I mentioned above that Keynesians doubtlessly get agitated that governments engage in fiscal consolidation during downturns. This is why I’m trying to get them to support spending caps. The good news, from their perspective, is that the government’s budget would be allowed to grow when there’s a recession, albeit not very rapidly. The tradeoff that they must accept, however, is that spending would be limited to that modest growth rate even during years when there’s strong growth and the private sector is generating lots of tax revenue.

Honest Keynesians presumably should yes to this deal since Keynes wanted restraint during growth years to offset “stimulus” during recession years. And economists at left-leaning international bureaucracies seem sympathetic to this tradeoff. I don’t think there are many honest Keynesians in the political world, however, so I’m not expecting to get a lot of support from my leftist friends in Washington.

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