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Archive for the ‘Keynesian’ Category

I don’t know whether to be impressed or horrified by Paul Krugman.

I’m impressed that he’s always “on message.” No matter what’s happening in America or around the world, he always has some sort of story about why events show the need for bigger government.

But I’m horrified that he’s so sloppy with numbers.

My all-time favorite example of his fact-challenged approach deals with Estonia. In an attempt to condemn market-based fiscal policy, he blamed that nation’s 2008 recession on spending cuts that took place in 2009.

Wow. That’s like saying that a rooster’s crowing causes yesterday’s sunrise. Amazing.

Let’s look at a new example. This is some of what he recently wrote while trying to explain why the U.S. has out-performed Europe.

America has yet to achieve a full recovery from the effects of the 2008 financial crisis. Still, it seems fair to say that we’ve made up much, though by no means all, of the lost ground. But you can’t say the same about the eurozone, where real G.D.P. per capita is still lower than it was in 2007, and 10 percent or more below where it was supposed to be by now. This is worse than Europe’s track record during the 1930s. Why has Europe done so badly?

Krugman answers his own question by saying that the United States has been more loyal to Keynesian economics.

…what stands out from around 2010 onward is the huge divergence in thinking that emerged between the United States and Europe. In America, the White House and the Federal Reserve mainly stayed faithful to standard Keynesian economics. The Obama administration wasted a lot of time and effort pursuing a so-called Grand Bargain on the budget, but it continued to believe in the textbook proposition that deficit spending is actually a good thing in a depressed economy.

I have to confess that alarm bells went off in my head when I read this passage.

If Krugman was talking about the two years between 2008 and 2010, he would be right about “staying faithful to standard Keynesian economics.”

But 2010 was actually the turning point when fiscal policy in America moved very much in an anti-Keynesian direction.

Here’s the remarkable set of charts showing this reversal. First, there was zero spending growth in Washington after 2009.

Second, this modest bit of fiscal restraint meant a big reduction in the burden of government spending relative to economic output.

Wow, if this is Keynesian economics, then I’m changing my name to John Maynard Mitchell!

So is Krugman hallucinating? Why is he claiming that U.S. policy was Keynesian?

Let’s bend over backwards to be fair and try to find some rationale for his assertions. Remember, he is making a point about U.S. performance vs. European performance.

So maybe if we dig through the data and find that European nations were even more fiscally conservative starting in 2010, then there will be some way of defending Krugman’s claim.

Yet I looked at the IMF’s world economic outlook database and I crunched the numbers for government spending in the biggest EU economies (Germany, UK, France, Italy, Spain, Netherlands, Sweden, Belgium, accounting for almost 80 percent of the bloc’s GDP).

And what did I find?

Contrary to Krugman’s claims, total government spending in those nations grew slightly faster than it did in the United States between 2009 and 2014.

So on what basis can Krugman argue that the U.S. had a more Keynesian approach?

Beats the heck out of me. I even looked at the OECD data on deficits to see whether there was some way of justifying his argument, but those numbers show the biggest reduction in red ink (presumably a bad thing according to Keynesian stimulus theory) took place in the United States.

But I will close by acknowledging that Krugman’s column isn’t just focused on fiscal policy. He also argues that the Federal Reserve has been more Keynesian than European central banks. My impression is that both the Fed and the ECB have been keeping interest rates artificially low, so I’m not sure that’s an effective argument (or an effective policy!), but I’ll leave that issue to the folks who specialize in monetary policy.

P.S. If you want additional examples of Krugman’s factual errors, see here, here, here, here, here, here, here,here, here, and here.

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I don’t know which group is more despicable, Greek politicians or the voters who elected them. In both cases, they think they’re entitled to other people’s money.

But since the “other people” in this case happen to live in nations such as Germany and Finland, and those folks don’t want to write blank checks to a bunch of moochers and looters, Greece faces a difficult choice.

Either the Greeks behave like adults and rein in their bloated public sector. Or they throw a tantrum, which presumably means both a default on payments to bondholders and a return to the unstable drachma currency.

My guess is they’ll eventually go with the latter option.

But maybe there’s hope for Greece. One of the Prime Minister’s chief economic advisers, an out-of-the-closet communist, has announced his resignation. Here are a few of the details from a story in the EU Observer.

Giannis Milios, a member of Syriza’s central committee and long time economic advisor to Greek prime minister Alexis Tsipras, resigned Wednesday… A professor of economic policy who defines himself as a Marxist, Milios is considered one of the most loyal members of the left-wing party.

So does this signal a shift to more mature and sensible policy?

Perhaps not. According to an article in the Wall Street Journal, the problem in Greece isn’t really the communists. It’s the American leftists like Paul Krugman!

Germany, many other governments and senior policy makers in Brussels believe…that recklessness has been encouraged by misguided political and economic philosophies and bad advice from abroad. It isn’t so much that many in Mr. Tsipras’s Syriza party are Marxists—the eurozone can handle followers of the bearded 19th-century German philosopher. It is more that they are seen to be excessively influenced by a 20th-century British economist—John Maynard Keynes—and his living Anglo-Saxon disciples. At finance ministers’ meetings in Brussels, Mr. Varoufakis has been accompanied by American economists James Galbraith and Jeffrey Sachs. From across the Atlantic, the new government gets strong rhetorical backing from Paul Krugman, Joseph Stiglitz and others.

Wow, this is remarkable. Who would have guessed that run-of-the-mill American leftists are more damaging to economic policy than communists!

I guess this is because the Marxists are probably harmless crazies who hang out in coffee houses and gripe about the capitalist class.

The American leftists like Krugman, by contrast, do real damage because they use discredited Keynesian theory to argue that politicians should be spending even more money to “stimulate” an economy that’s in a crisis because of previous bouts of government spending.

Sort of like trying to get out of a hole by digging even deeper.

What’s amazing is that Krugman and other American statists are pushing bad policy when there are successful examples of nations escaping fiscal crisis with genuine spending cuts.

John Dizard wrote an interesting article about Greece for the Financial Times. He began his article by quoting Krugman, who wrote that the plans of the crazy Greek government are “not radical enough.” Dizard also shared another quote from Krugman, which criticized proponents of lower spending because “the best the defenders of orthodoxy can do is point to a couple of small Baltic nations.”

So Dizard decided to compare Greece with those Baltic nations of Estonia, Latvia, and Lithuania.

There are…some practical lessons to learn from…the contrasting ways that Greece has dealt with the world after the global financial crisis compared with the relatively poor Baltic states. Greece took a path of gradual fiscal adjustments weighted towards tax increases, accompanied by a partial debt default. The Baltic states adopted rapid and deep cuts in their state expenditure and current account deficits.

And here’s a shocking bit of news, though it won’t be surprise to folks in the real world. The Baltics have done far better.

The big issue in the Baltic states is upward wage pressure from tight labour markets. That is what we call a high-class problem. This understates the Baltic countries’ achievements. …They also did this without much benefit from concessionary multilateral finance or international debt haircuts.

Dizard looks at some of the differences between the Baltic nations and Greece.

There were virtually no dismissals from the Greek civil service over this period. Salaries were cut, but public sector staffing was reduced with lay-offs of temporary contract workers and early retirements. This had the effect of reducing already low service levels and transferring costs from payrolls to pension obligations. Latvia fired one-third of its civil servants. …The tax burden [in Greece] on salaried workers, compliant domestic businesses and property owners was substantially increased. In contrast, the Baltic states have fairly flat and relatively low tax rates.

All this is music to my ears since I’ve already written about the successful spending cuts in the Baltic countries.

And I particularly enjoyed having the opportunity, back in 2012, to correct the record when Krugman tried to blame Estonia’s 2008 recession on spending cuts that occurred in 2009.

P.S. Since today’s column focused on the statist ideas of Paul Krugman and because he’s a leading voice for the notion that more government spending somehow “stimulates” growth, I can’t resist sharing an explanation of Keynesian economics I gave back in 2009 as part of some remarks to Colorado’s Steamboat Institute.

Feel free to watch the whole video, but fast forward to 3:30 if you’re pressed for time. I’m being snarky, of course, but I also think my debunking of so-called stimulus is spot on.

P.P.S. By the way, the above video is from the Q&A portion of my remarks. If you watch my my actual speech, and if you pay attention about the 1:35 mark, you’ll see I was talking about the importance of having government grow slower than the economy’s productive sector back in 2009 even though I didn’t unveil Mitchell’s Golden Rule until two years later.

P.P.P.S. Since we’re picking on Krugman, here’s something that’s making the rounds on Twitter.

Good ol’ Professor Krugman praised the European approach of bigger government back in 2010, and everything that’s happened since that point has made his assessment look foolish.

Sort of reminds me of the time he attacked me for my gloomy assessment of California and claimed that the Golden State’s job market was strong. But it turns out that California had the 5th-highest unemployment rate in the nation.

P.P.P.P.S. Let’s close with the observation that the mess in Greece shouldn’t be blamed on Krugman. Sure, he’s giving bad advice, but Greek politicians deserve the lion’s share of the blame. Moreover, to the extent that outside advisers get blamed, we should remember that economists like Joseph Stiglitz and Jeffrey Sachs also are involved, and in some cases exercising more influence than Krugman.

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Keynesian economics is a perpetual-motion machine for statists. The way to boost growth, they argue, is to have governments borrow lots of money from the economy’s productive sector and then spend it on anything and everything.

Even if the money is squandered on global defense against a make-believe alien attack, according to Keynesians like Paul Krugman!

Krugman also has argued that a real war is good would be good for growth since the goal is simply more spending.

Heck, Krugman even asserted the 9-11 attacks were good for the economy because governments then spent more money.

And Nancy Pelosi actually argued that paying people not to work was a great way of creating jobs. I’m not joking.

Amazing. It’s almost as if these people are secret libertarians and they’re saying crazy things to discredit Keynesianism.

But they’re actually serious. This makes it difficult to tell the difference between satire and reality (though this collage is a good example of the latter).

I’ve explained (over and over again) why the Keynesian theory is misguided, and even narrated a video on the topic.

But I suspect most people are more convinced by real-world evidence, which is why I’ve used data from nations such as Germany, Japan, Switzerland, Canada, the United Kingdom, and the United States to show that bigger government generally hampers prosperity.

Now let’s add to this wealth of evidence, but this time focus on developing economies.

Ruchir Sharma, head of emerging markets for Morgan Stanley Investment Management, has a column in the Wall Street Journal that reviews the track record of so-called stimulus in developing nations.

He starts by noting that some of the usual suspects are pushing for more Keynesianism.

…expect more big names to join the chorus calling for increased government spending to enliven the flailing global recovery. President Obama and Treasury Secretary Jack Lew are among the voices urging European leaders to spend more. The International Monetary Fund and former Treasury Secretary Larry Summers —who wrote in the Financial Times in October that “there is for once a free lunch”—have even been arguing that government borrowing to build roads or airports would more than pay for itself. If only governments in the developed world would start spending more, this refrain goes, the global economy’s future would be brighter.

But Mr. Sharma explains that many countries in the developing world just had a very bad experience with Keynesian economics.

…it is worth noting that the big emerging nations—China, Russia and Brazil—have just tried a full-throttle experiment in stimulus spending, and it failed….Their experiment began in late 2008. …the leaders of these nations turned to the ideas of John Maynard Keynes… The emerging economies embarked on a spending campaign that dwarfed its counterparts in the U.S. and Europe….The emerging ones spent more than half again as much, 6.9% of GDP. And that figure does not include the money that many big emerging nations continued to pump into their economies by ordering state banks to ramp up lending. These directives vastly boosted the scale of the stimulus, particularly in China… Keynesians everywhere let out a cheer.

Here’s some of the data.

Since 2010, the growth rate in China has fallen by a third and is headed below 7%. Brazil is in recession. Russia, which spent a staggering 10% of GDP on stimulus, is now contracting sharply. What happened? Emerging nations borrowed from the future to produce that flash of growth in 2010, and now they face the bills. Their government budgets have fallen into the red…public debt has risen significantly, throwing the books out of balance. …the IMF and others are lowering forecasts for emerging-world GDP growth for the rest of this decade to 4% or less—a return to the pace of the crisis-ridden 1990s.  …The message: When the state spends in haste, it will repent at leisure.

But there is some good news.

Many leaders in emerging nations now recognize that bigger government is not a recipe for prosperity.

…emerging-world leaders admit that their own stimulus experiments backfired. In May, Chinese Premier Li Keqiang warned that using stimulus to generate growth is “not sustainable” and “creates new problems.” …Agustín Carstens, the president of Mexico’s central bank, recently told me that in the long run “fiscal and monetary policy cannot create growth.” And former Indian finance minister P. Chidambaram admitted that his government “lost control of the economy” because of a stimulus campaign that led to higher deficits and inflation.

I guess we can add these officials to the list that already includes leaders from Portugal and Finland, who also have acknowledged that economic growth is undermined when the burden of government spending is increased.

Unfortunately, the lesson isn’t being learned in America, at least not in the rudimentary reading class that is otherwise known as the Obama Administration.

P.S. You can enjoy some good anti-Keynesian humor by clicking here, here, here, and here.

P.P.S. There are some Republican Keynesians, so this is a bipartisan problem.

P.P.P.S. Happy Birthday to the Princess of the Levant. We’re celebrating in the Cayman Islands, where there’s warm sunshine, clear ocean, and zero income tax.

P.P.P.P.S. Returning to the unpleasant topic of Keynesian economics, it’s very discouraging that Obama Administration officials seem so intent on pushing bad policy in other nations.

P.P.P.P.P.S. The New York Times publishes a lot of Krugman’s diatribes, but they also make room for other fact-challenged Keynesians.

P.P.P.P.P.P.S. For those of us who try to educate policy makers, Keynesian economics is like a Freddy Krueger movie.

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I’m tempted to feel a certain degree of sympathy for Paul Krugman.

As a leading proponent of the notion that bigger government stimulates growth (a.k.a., Keynesian economics), he’s in the rather difficult position of rationalizing why the economy was stagnant when Obama first took office and the burden of government spending was rising.

And he also has to somehow explain why the economy is now doing better at a time when the fiscal burden of government is declining.

But you have to give him credit for creativity. Writing in the New York Times, he attempts to square the circle.

Let’s start with his explanation for results in the United States.

…in America we haven’t had an official, declared policy of fiscal austerity — but we’ve nonetheless had plenty of austerity in practice, thanks to the federal sequester and sharp cuts by state and local governments.

If you define “austerity” as spending restraint, Krugman is right. Overall government spending has barely increased in recent years.

But then Krugman wants us to believe that there’s been a meaningful change in fiscal policy in the past year or so. Supposedly there’s been less so-called austerity and this explains why the economy is doing better.

The good news is that we…seem to have stopped tightening the screws: Public spending isn’t surging, but at least it has stopped falling. And the economy is doing much better as a result. We are finally starting to see the kind of growth, in employment and G.D.P., that we should have been seeing all along… What held us back was unprecedented public-sector austerity…now that this de facto austerity is easing, the economy is perking up.

But where’s his evidence? Whether you look at OMB data, IMF data, or OECD data, all those sources show that overall government spending has been steadily shrinking as a share of GDP ever since 2009.

And deficits also are shrinking as a share of economic output according to all these measures, so there’s still “austerity” regardless of whether we’re looking at the underlying disease of government spending or the symptom of red ink.

I sliced and diced the data to see if there was some way of justifying Krugman’s hypothesis and the only numbers that are (vaguely) supportive are the ones from the IMF that show total government spending (federal, state, and local) has increased by an average of 2.3 percent annually over the past two years, after increasing by 1.3 percent per year over the prior three years.

On that basis, one could sort of argue that Krugman is right and “austerity is easing.”

But if that’s his definition of victory, then I’m more than willing to let him be the winner. If we can constrain the public sector so that it grows at 2.3 percent annually, we’ll be complying with my Golden Rule and the burden of government spending will continue to slowly but surely shrink as a share of GDP.

And we’ll definitely have much better fiscal policy than we had between 2002-2009, when overall government spending rose by an average of 7.1 percent annually.

So does this mean Krugman and I are on the same page? During the Los Angeles riots in 1992, Rodney King famously asked, “Can we all get along?” Assuming Krugman is being serious, the answer in late 2014 is yes. It’s time to join hands and sing Kumbaya!

But you may sense a slight tone of sarcasm in my remarks, and that’s because Krugman surely doesn’t want government to “only” grow by 2.3 percent annually. He simply wants to justify his hypothesis that the economy’s improving performance is somehow due to less austerity. Even if that means he’s implicitly endorsing genuine spending restraint.

In other words, Krugman actually is being slippery and misleading in his analysis of American austerity.

But that’s nothing compared to his analysis of so-called austerity on the other side of the Atlantic Ocean. Here’s some of what he wrote about fiscal policy in the United Kingdom.

…in 2010 Britain’s newly installed Conservative government declared that a sharp reduction in budget deficits was needed to keep Britain from turning into Greece. Over the next two years growth in the British economy, which had been recovering fairly well from the financial crisis, more or less stalled. In 2013, however, growth picked up again — and the British government claimed vindication for its policies. Was this claim justified? No, not at all.

Krugman then claims that there was better economic performance because U.K. politicians decided against “further cuts.”

What actually happened was that the Tories stopped tightening the screws — they didn’t reverse the austerity that had already occurred, but they effectively put a hold on further cuts. …And sure enough, the nation started feeling better.

So is he right?

Well, the IMF numbers show that overall government spending has been growing, on average, by 2 percent annually since 2009. By today’s standards, that’s a decent record of spending restraint.

But what if we dissect the numbers? Did spending grow very slowly between 2010-2012, followed by a relaxation of restraint beginning in 2013? In other words, is Krugman’s argument legitimate, even if it requires him to implicitly endorse (as in the American example) decent fiscal discipline over the past two years?

Nope. Instead, the numbers show just the opposite. Between 2010-2012, the burden of government spending expanded by an average of 2.3 percent per year.

But over the past two years, the “austerity” has become tighter and the budget has grown by 1.5 percent annually.

In other words, it seems that Krugman is either sloppy or mendacious.

Though I’m going to give him an escape hatch, a way of justifying his assertions. When the Tories took over in the United Kingdom, they quickly imposed a series of tax hikes (in addition to the tax hikes imposed by the outgoing Labor government). But since that time, the government has implemented some tax cuts, most notably reductions in corporate tax rates and lower tax rates on personal income.

So if Krugman wants to argue that tax increases retarded the British economy for a few years and that tax cuts are now helping to boost growth, I’m willing to give him a probationary membership in the supply-side club.

But I don’t expect him at the next meeting.

P.S. This isn’t the first time Krugman has mangled numbers when analyzing U.K. fiscal policy.

P.P.S. He’s also butchered data when writing about fiscal policy in nations such as France, Estonia, and Germany,

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I wrote earlier this year about the “perplexing durability” of Keynesian economics. And I didn’t mince words.

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?

And I specifically challenged Keynesians in 2013 to explain why automatic budget cuts were supposedly a bad idea given that the American economy expanded when the burden of government spending shrank during the Reagan and Clinton years.

I also issued that same challenge one day earlier, asking Keynesians to justify their opposition to sequestration given that Canada’s economy prospered in the 1990s when government spending was curtailed.

It seems that the evidence against Keynesianism is so strong that only a fool, a politician, or a college professor could still cling to the notion that bigger government leads to more growth.

Fortunately, it does appear that there’s a growing consensus against this free-lunch theory.

Professor John Cochrane of the University of Chicago (and also an Adjunct Scholar at Cato) has a superb column about the retreat of Keynesianism in today’s Wall Street Journal.

The tide also changed in economic ideas. The brief resurgence of traditional Keynesian ideas is washing away from the world of economic policy. …Why? In part, because even in economics, you can’t be wrong too many times in a row. …Our first big stimulus fell flat, leaving Keynesians to argue that the recession would have been worse otherwise. George Washington’s doctors probably argued that if they hadn’t bled him, he would have died faster. With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly. The story is similar in the U.K.

All of this is spot on. Once the stimulus was replaced by spending restraint, the economy did better. And job creation picked up when subsidies for unemployment were limited, just as more sensible economists predicted.

Cochrane is also correct about the spending restraint in the United Kingdom. I didn’t expect Cameron and Osbourne to deliver some good fiscal policy, but it’s happening and the British economy is the envy of most other European nations.

The column also looks at past Keynesian failures.

These are only the latest failures. Keynesians forecast depression with the end of World War II spending. The U.S. got a boom. The Phillips curve failed to understand inflation in the 1970s and its quick end in the 1980s, and disappeared in our recession as unemployment soared with steady inflation.

But this isn’t just about empirical evidence.

I’ve used humor to debunk Keynesianism. Professor Cochrane takes a more high-brow approach to show why the theory doesn’t make sense.

Hurricanes are good, rising oil prices are good, and ATMs are bad, we were advised: Destroying capital, lower productivity and costly oil will raise inflation and occasion government spending, which will stimulate output. Though Japan’s tsunami and oil shock gave it neither inflation nor stimulus, worriers are warning that the current oil price decline, a boon in the past, will kick off the dreaded deflationary spiral this time. I suspect policy makers heard this, and said to themselves “That’s how you think the world works? Really?” And stopped listening to such policy advice. …in Keynesian models, government spending stimulates even if totally wasted. Pay people to dig ditches and fill them up again. By Keynesian logic, fraud is good; thieves have notoriously high marginal propensities to consume.

By the way, just in case you think he’s exaggerating, keep in mind that Paul Krugman actually argued that a fake invasion from outer space would “stimulate” growth because the world would waste money building defenses against E.T.

And Krugman also argued that the 9-11 terrorist attacks were pro-growth!

Cochrane closes with some optimistic thoughts.

…no government in the foreseeable future is going to enact punitive wealth taxes. Europe’s first stab at “austerity” tried big taxes on the wealthy, meaning on those likely to invest, start businesses or hire people. Burned once, Europe is moving in the opposite direction. Magical thinking—that, contrary to centuries of experience, massive taxation and government control of incomes will lead to growth, prosperity and social peace—is moving back to the salons. …the policy world has abandoned the notion that we can solve our problems with blowout borrowing, wasted spending, inflation, default and high taxes. The policy world is facing the tough tradeoffs that centuries of experience have taught us, not wishing them away.

I wish I was equally optimistic about the death of Keynesianism. As I glumly stated a few years ago, Keynesian economics is like a Freddy Krueger move, inevitably rising from the dead when politicians want to rationalize wasting money on favored interest groups.

But I hope Cochrane is right and I’m wrong.

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

P.S. Since it’s the holiday season and I’m sharing videos, here’s a very clever and funny video about Keynesian Christmas carols.

The songs in the second half of the video are the ones that make sense, of course, and I particularly like the point that consumer spending is a reflection of growth, not a driver of growth.

P.P.S. If you want even more visual content, 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.

P.P.P.S. But if you want more humor about Keynesian economics, click here, here, here, and here.

P.P.P.P.S. Let’s end on a serious note. It’s encouraging that leaders from nations at opposite ends of Europe are acknowledging the shortcomings of Keynesianism.

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I don’t know if this is a good personality trait or a character flaw, but it always brings a big smile to my face when a leftist tries to argue for bigger government but inadvertently makes an argument in favor of smaller government. Sort of like scoring a goal against your own team in soccer.

It seems to happens quite a bit at the New York Times.

A New York Times columnist, for instance, pushed for a tax-hiking fiscal agreement back in 2011 based on a chart showing that the only successful budget deal was the one that cut taxes.

The following year, another New York Times columnist accidentally demonstrated that politicians are trying to curtail tax competition because they want to increase overall tax burdens.

In a major story on the pension system in the Netherlands this year, the New York Times inadvertently acknowledged that genuine private savings is the best route to obtain a secure retirement.

But it’s not just people who write for the New York Times.

The International Monetary Fund accidentally confirmed that the value-added tax is a revenue machine to finance bigger government and heavier tax burdens.

A statist in Illinois tried to argue that higher taxes don’t enable higher spending, but his argument was based on the fact that politicians raised taxes so they wouldn’t have to cut spending.

We now have another example of a leftist inadvertently making an argument in favor of limited government (h/t: Coyote Blog via Cafe Hayek).

Kevin Drum of Mother Jones recently published an article that includes a chart showing that private-sector job creation has been much stronger under Obama’s recovery than during Bush’s recovery.

So how do we interpret this data?

I think one interpretation, as I argued both in 2012 and in 2013, is that gridlock is good for the economy. As you can see from Drum’s chart, job creation in the private sector jumped significantly toward the end of 2010, just as the GOP took control of the House of Representatives.

It’s quite reasonable to think, after all, that the private sector greeted the development with a sigh of relief since it meant Obama would be stymied if he tried to impose any major new fiscal or regulatory burdens through the legislative process.

Drum, however, accidentally gives us another reason why private-sector job creation has been at least somewhat impressive. Writing last year, he showed that the overall burden of government spending has been on a downward trajectory.

Here’s a chart from that article. He looks at inflation-adjusted per-capita total government spending, including outlays at the state and local level. If you look at the red line, which measures what’s been happening since the summer of 2009, you can see that we’re actually making some progress in reducing the burden of government spending.

Drum, needless to say, wants people to believe the downward trend in overall spending is somehow bad for the economy.

…as the chart above shows. After every other recent recession, government spending has continued rising steadily throughout the recovery, providing a backstop that prevented the economy from sliding backward. …But this time, even though the 2008 recession was deeper than any of those previous ones, it didn’t. …total government spending peaked in the second quarter of 2010 and then started falling, falling, and falling some more. Today, government spending at all levels—state, local, and federal combined—has declined 7 percent

I haven’t fact-checked Drum’s specific calculations, but I assume his math is correct. After all, I showed earlier this month that federal government spending has been flat for the past five years, and I was looking at nominal data rather than inflation-adjusted or population-adjusted numbers.

Likewise, I shared a chart last month showing that state and local government spending also has been flat since about 2010.

But the quality of the numbers isn’t my main point. Let’s focus instead on the accidental message of Drum’s two charts. If you put them together, as was done by Warren Meyer of Coyote Blog, then you see a clear correlation. Under Bush, government spending increased during the recovery and private-sector job creation was nonexistent. But under Obama, there’s been a decline in government spending and private-sector job creation has been far more impressive.

In other words, the message of Drum’s two charts is precisely the opposite of what he wants us to believe.

Instead of achieving his goal of demonstrating that Keynesian “stimulus” is desirable, Drum instead has demonstrated that spending cuts are associated with better economic performance.

Maybe we need some sort of “Wrong Way Corrigan” Award for people like Drum who inadvertently help the cause of economic liberty.

Though, to be fair, we’re only talking about two data series (private-sector jobs and overall government spending) and we’re only looking at two recoveries (2001 and 2007), so I imagine Drum and others could concoct semi-plausible explanations for why the aforementioned correlation doesn’t imply causation.

After all, crowing roosters don’t cause the sun to rise.

This is why I’m a big believer in looking at overall economic policy over long periods of time. All sorts of quirks may explain why one country grows faster than another country in any given year. But when you look at several decades of data, then certain relationships become clear.

And when you compare long-run economic performance in market-oriented nations and statist countries, there’s only one logical conclusion. If you don’t believe me, just check out these differences:

P.S. By the way, job creation hasn’t been that impressive during the Obama years. Yes, there have been more jobs created (particularly private-sector jobs) during the current recovery compared to the post-2001 recovery, but check out this data from the Minneapolis Fed showing the Obama recovery (red), the Bush recovery (green), and the Reagan recovery (blue).

Obama has done better than Bush, but Reagan is the slam-dunk winner.

But it’s not just that Reagan’s recovery was far better than what we got under Bush and Obama. If you added every single recovery to the chart, the 2001 and 2007 recoveries would be the weakest.

So maybe the lesson is that statist economic policy (of all types, not just fiscal policy) is a bad idea, regardless of whether a politician is Republican or Democrat.

Hmmm….it’s almost enough to make one think that free markets and small government are a recipe for prosperity.

And maybe this is why statists still don’t have an acceptable answer for my two-part challenge.

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You’re probably surprised by the title of this post. You may even be wondering if President Obama had an epiphany on the road to Greece?

I don’t mean to burst your bubble, but the leader we’re talking about isn’t the President of the United States.

Instead, we’re talking about the Prime Minister of Finland and he deserves praise and recognition for providing one of the most insightful and profound statements ever uttered by a politician.

He explained that the emperor of Keynesian economics has no clothes.

As reported by Le Monde (and translated by Open Europe), here’s what Alexander Stubb said when asked whether European governments should try to “stimulate” their economies with more spending.

We need to put an end to illusions: it’s not the public sector that creates jobs. To believe that injecting billions of euros [into the economy] is the key to growth is an idea of the past.

Amen.

You don’t make a nation richer by taking money from one pocket and putting it in another pocket.

Particularly when the net effect is to redistribute funds from the productive sector to the government.

I’m glad Mr. Stubb has figured this out. I just with some American politicians would look at the evidence and reach similarly wise conclusions.

The Obama Administration, for instance, still wants us to believe the faux stimulus was a success.

And speaking of our President’s views, this Gary Varvel cartoon isn’t new, but it’s right on the mark.

Any “job” created by government spending necessarily comes at the expense of the private sector.

And since I’m sharing old cartoons, here’s one that also is a nice summary of what happens when government gets bigger.

This cartoon definitely belongs in my collection (here, herehereherehere, here, herehereherehere, here, and here) of government as a blundering, often-malicious, overweight nitwit.

P.S. Other European policy makers have admitted that Keynesian economics is a farce.

P.P.S. Finland has the world’s 7th-freest economy, significantly better than the United States.

P.P.P.S. If you want some humor about Keynesian economics, click here.

P.P.P.P.S. If you prefer tragedy instead of humor, here are some horrifying quotes by Barack Obama and Hillary Clinton.

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