US Economic “Growth, Deficits, and the Future” (J.D. Foster – Heritage Foundation)

Following is an article by J. D. Foster, Ph.D., who is the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation (http://www.heritage.org/).

 J.D. Foster, Ph.D., The Heritage Foundation

Foster’s article addresses the anticipated impact of further government spending (i.e., fiscal stimulus) upon the U.S. economy, in the short run and beyond.  Foster provides a counter-argument to the recommendations and justifications of Economist Paul Krugman for further government spending.  The crux of the article is that the most healthy approach to helping the U.S. economy to recover from the current recession is not by increased fiscal stimulus, but rather by reducing taxes at all levels of the economy to encourage growth in private, nongovernment business.

Following are some noteworthy selections from the complete article (here).  (Bold, italicized,  and underlined text are provided by myself to draw attention to key thoughts in Foster’s article.)  

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“Growth, Deficits, and the Future”

by J.D. Foster, Ph.D., The Heritage Foundation
WebMemo #2150, December 3, 2008

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Paul Krugman, in his article in The New York Times on December 1, “Deficits and the Future,” discusses deficit spending reflecting both the weakening state of the economy and his response to the changed political climate in Washington, D.C.  Krugman tells a good story, but in calling for even more spending he misses the punch line badly. Tax rate reduction, not another dose of deficit spending, is the key to a stronger economy.

Globally, and certainly in the United States, an intense debate is underway as to the proper magnitude of fiscal stimulus programs to “jumpstart,” “jolt,” or otherwise stimulate national economies as the global economy slides into a deep contraction. For some, a big boost to government spending is the natural solution, especially since they can identify so many “unmet needs” awaiting federal largesse. Neither desperation nor opportunism justifies ineffective and misguided action. These troubled times demand policies that work.

Fiscal Stimulus That Works

The global economic downturn looks to be quite deep. Even optimists do not foresee the recession that began in the United States at the end of 2007 to end until the second half of 2009. Naturally, the focus is on a government response, as though all solutions come from Washington. And, naturally, the response from Washington is to do what Washington excels at: spending money.

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Suppose for a moment that the fiscal stimulus is effective in pumping up aggregate demand. The budget deficits under current policy for 2009 through 2011 are already around $1 trillion for each year, not counting the budget effects of the various financial bailouts. Put those figures in perspective: In dollar terms, the largest federal budget deficit ever was recorded in 2004 at $413 billion. As a percent of the economy, the largest was 6 percent in 1983. Even before any new policies, the deficit in 2009 is already an astonishing 8 percent of gross domestic product or more. If deficit spending stimulates the economy, then a $1 trillion deficit should suffice to launch a rapid expansion. If $1 trillion is not enough to end the recession, then another $500 billion in deficit spending surely will not do any better.

No Downsides to Deficit Spending?

… The (often wrong) conventional wisdom is that Congress will pass a fiscal stimulus plan of a half trillion dollars or more early in 2009, including some mixture of extended unemployment insurance benefits, food stamp spending, relief to the states, highway spending, and whatever other ingredients can be tossed into the fiscal goulash.

Krugman argues that there can be none of the traditional crowding out of private investment when government increases its borrowing (driving the deficit up from a trillion dollars). There may be none of the traditional downsides, but there are none of the promised upsides, either. The simple fact is that when government borrows a dollar, either the dollar was borrowed at home (reducing domestic consumption or investment) or it was borrowed from abroad, thereby increasing the trade deficit. Either way, the increase in aggregate demand from government spending is matched by a reduction in aggregate demand from the private sector.

Investing for the Future

The economy is weak and weakening, so prudent, effective fiscal stimulus is certainly called for. But that does not mean increased spending. At a minimum, it means making the tax relief enacted in 2001 and 2003 permanent–especially the reductions in individual income tax rates, the reduction in the dividends tax rate, and the reduction in the capital gains tax rate. Threatening rate increases is no way to stimulate an economy, as Krugman notes in his editorial. …

Keeping current tax policy is not stimulus; it is the elimination of a threat. True stimulus means cutting individual and corporate tax rates to encourage entrepreneurs to start new businesses and existing businesses to invest more. The economy is certainly weak today, but business startups and investment are about the future. Current economic troubles will pass and the economy will regain its strength. Lower tax rates will encourage businesses to prepare better now for future growth and in so doing will bring about a future of stronger economic growth. An effective fiscal stimulus means cutting tax rates—not because of the resulting higher deficits but because tax rate cuts improve the incentives for workers, investors, and producers to do more, thus stimulating the economy.

The Grand Teton Mountains, Wyoming, USA (www.ohranger.com)

 

Critical View of Keynesian Economics (Peter Boettke – The Austrian Economists Blog)

Following is an article on “The Legacy of Lord Keynes” by Peter Boettke of George Mason University, one of the authors of  “The Austrian Economists” Blog (here) .  Here is a link to the full article:

http://austrianeconomists.typepad.com/weblog/2008/11/the-legacy-of-lord-keynes.html

 The Austrian Economists (economics.gmu.edu)

In this article, Boettke is critical of the fruits of Keynesian economic policies as practice in various countries since 1940.  His view is consistent with the “Austrian School” of economics which in general is very supportive of free market economic policies with limited government interference.  Correspondingly, this school of economic thougth typically takes a very dim view of the effectiveness government fiscal intervention upon economic growth.  

As you can deduce, Austrian economists are typically NOT in favor of the types of government fiscal intervention being practiced in these days.  For more on this train of economic thought I would encourage you to visit such websites as the Ludwig von Mises Institute (http://mises.org/), the CATO Institute (http://www.cato.org/), The Heritage Foundation (http://www.heritage.org/), The Foundation for Economic Education (http://www.fee.org/) and other free market economics-oriented websites.

My own personal leaning is in this “free market”, limited interventionist direction.  That said, I surely respect such capable economists as Greg Mankiw and Larry Summers.  Lets hope that capable and sound economic advice is provided to the incoming administration in regards to policies that will truly promote long term economic growth in the U.S., with as much limitation as possible in the debt leverage of the U.S. government upon the U.S. economy.

Following are a few pertinent exerpts from Peter Boettke’s article taking a critically constructive view of Keynesian economic practices.

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The Legacy of Lord Keynes

By Peter Boettke, George Mason University, pboettke@gmu.edu

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“The problem with economics since 1940 has been the thorough victory of Keynes throughout the democratic western nations.  We have Keynesian theory, the development of Keynesian inspired data collection, the “testing” of Keynesian theory via Keynesian data with the purpose of providing tools for Keynesian policy.  This exercise survived the Monetarist and New Classical intellectual challenge, and it survived the Supply Side revolution in policy.  All that remained was an oscillation between liberal and conservative Keynesianism, never a serious challenge to the paradigm of Keynesian policy manipulation of the economy.”

“Instead of reading Keynes one more time with feeling, I would suggest an alternative reading experience. (Or at least an additional one)  Start with Henry Hazlitt, ed., The Critics of Keynesian Economics, move on to Hazlitt’s The Failure of the “New Economics”, graduate to W. H. Hutt’s The Keynesian Episode, and then read closely Buchanan and Wagner’s Democracy in Deficit and then Higgs’s Crisis and Leviathan and War, Depression, and Cold War.”

“Sincerely, you want to know what is going on in 2008 — it is the consequence of the bad economic ideas of Lord Keynes that have led to the victory of Keynesian policy (of either the liberal or conservative variety) since 1940.  We are living through the consequences of Keynes’s ideas. The Soviet Union had to confront the legacy of Marxist-Keynesianism in the 1980s, and we are dealing with the consequences of Social Democratic-Keynesianism in the 2000s.”

“Hayek warned us about the “tiger by the tail” problem of inflation and Buchanan warned us about the destruction of the “old-time fiscal religion” due to Keynesianism.  Yes, Marxism and Social Democracy caused serious problems as they reflected a breakdown in restraints on the power of government, but we have to also recognize the fundamental role that Keynesian ideas on economics and economic policy fed into this shift from constitutional democracy to social democracy throughout the 20th century in the West and the policy reality of conspicuous production for “growth accounting” in the Soviet Bloc nations after the Industrialization Debate in the 1920s, the Collectivization of the 1930s, and Five-Year Planning system from Stalin to Brezhnev. Keynesianism represented the pushing open of an already opened door to fiscal and monetary irresponsibility and opportunistic politicians left and right walked right through.  I am sure stating this sentiment this way will qualify me as a “wing-nut” in Brad De Long’s classifications, but instead of admitting my “wing-nutness” I would rather we have a serious discussion of the consequences of Lord Keynes with respect to world-wide fiscal imbalance associated with intergenerational accounting and world-wide inflation as governments attempt to meet those obligations through monetization of debt.  Somehow I doubt that will take place in our current intellectual and policy context.”

 

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“Keynes isn’t the intellectual solution to our current woes, his ideas are one of the primary reasons we are in this mess in the first place. He was wrong in 1936, he was wrong in 1956 and 1976, and he is certainly wrong in 2008 and will be wrong in 2036.  Bad economic ideas result in bad economic policy which in turn result in bad economic consequences, and that simple linear relationship is true across time and place.  Until we come to grips with the implications of this, we will not understand the consequences of Lord Keynes for our economic future let alone the economic future of our grandchildren.”

The Canadian Rockies (here)

“Far-Reaching Reforms Can Wait” According to Robert J. Samuelson

In a December 1st article, Newsweek business and economics writer Robert J. Samuelson (background info) addressess the issue of whether or not the Administration of President-elect Barack Obama should aggressvely pursue various major reforms immediately in early 2009, or wait until the U.S. economy recovers. 

 Robert Samuelson’s weekly column explores political, economic and social issues. He began his journalism career in 1969 and has held positions at The Washington Post, The National Journal, and Newsweek. Samuelson has won numerous awards, including The Gerald Loeb Award for Best Commentary in 1993, 1986 and 1983 (Source for picture and description, Investor’s Business Daily Editorials– here)

Samuelson’s opinion on the preferable public policy / economic policy course for the Obama Administration to take is consistent with the title of the December 1st article, i.e., “Far-Reaching Reforms Can Wait”  The full article can be found at the following web address: http://www.realclearpolitics.com/articles/2008/12/obamas_hard_choice.html

Following are some key exerpts from the article, with underlines and bold text on areas that I personally think are most important to consider ….

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Far-Reaching Reforms Can Wait

By Robert Samuelson, Newsweek, 12/1/2008

WASHINGTON — As he assembles his economic team, Barack Obama faces a central strategic decision that only he can make. Starting with his “economic stimulus” plan, will he focus mainly on reviving the economy and relieving the financial crisis? Or will he use the economic crisis as a vehicle to advance a more ambitious social and economic agenda? The two approaches are at odds. The first aims at building political consensus and economic confidence; the second would intensify political conflict and economic uncertainty.

The decision ought to be easy. Every new president is assaulted by his own supporters, who want him to put their particular agendas atop his “to do” list. That’s already happening, as Obama allies clamor for speedy action to provide universal health insurance, combat global warming and support trade unions. But Obama — and the nation — would be better served if he concentrated for his first year on stabilizing the economy while patiently laying the groundwork for more far-reaching proposals.

The hallmark of this economic crisis has been its capacity to surprise: the desperate plight of the Big Three U.S. automakers is the latest reminder. We can expect more surprises, because the U.S. and global economies continue to weaken at a worrying pace. Consumer confidence has plunged. In October, U.S. factory orders for durable goods (machinery, autos, appliances) dropped 6.2 percent. Abroad, signs are no better. Worldwide manufacturing production is declining at an 8 percent rate. Germany is in recession; China’s growth has slowed sharply.

Against this backdrop, the parallel pursuit of crisis management and sweeping domestic reform is at best distracting. In practice, it may be politically poisonous. Superficially, the two objectives can be made to seem compatible. Obama can plug “green” investments as a way to restore job growth; he can tout a more efficient health-care system as a way to control health costs. But these rhetorical debating points obscure as much as they reveal.

Any program to refashion the energy and health-care sectors — to take these obvious candidates — would be complicated and contentious. Some producers and consumers would win; others would lose. Proposals would create massive uncertainties for businesses and raise the probability of higher costs. To succeed in curbing greenhouse gas emissions, for example, any “cap and trade” program must involve higher energy prices.

The notion that “green” investments would be large, permanent net creators of jobs is mostly a mirage. Somehow these investments must be paid for. If that happens through higher prices, higher taxes or cuts in other government programs, then “green” jobs will mainly substitute for other types of jobs. As for curbing health-care costs, that’s desirable. The trouble is that the first effect of Obama’s health-care program would probably be the opposite. Expanding insurance coverage would initially raise health spending, as greater demand for medical care met a (relatively) fixed supply of doctors, hospitals and clinics.

Obama won the election, and in normal times, his campaign agenda ought to be front and center. But these are not normal times, and what’s most important now — as he repeatedly emphasizes — is to prevent the recession from feeding on itself. This is a clear danger. Consumer spending (70 percent of the economy) has declined for five consecutive months. Eroding tax revenues may result in state budget deficits between $200 billion and $250 billion through mid-2011, estimates the Center on Budget and Policy Priorities, a liberal advocacy group. Required to balance their budgets, states face increased taxes or large spending cuts.

The compelling case for a big “economic stimulus” package is that it would cushion these and other spending declines. The odds are that any package will include the following: some direct payments to states; a renewed extension of unemployment benefits; tax cuts — reflecting Obama’s campaign pledge — of $500 for most single workers and $1,000 for most two-earner families; spending for infrastructure (roads, bridges, schools and, perhaps, windmills). Obama wants Congress to pass a stimulus package soon after his inauguration. Assuming he gets his wish, it’s then that he must make his crucial choice.

The temptation will be to press ahead with a “bold” legislative agenda — to ape the New Deal. This would be a mistake. The psychology of bruising legislative battles will not bolster confidence. The country does need to face its health and energy problems as well as deficit-ridden federal budgets. But trying to do too much too soon risks doing none of it well. We — and he — are caught up in a web of contradictions. In the long run, we need to discipline our appetite for health care and energy; we need to reconcile our desire for government benefits and our willingness to be taxed. But Obama’s first job is to avert an economic freefall.

Copyright 2008, Washington Post Writers Group

 The Andes of South America (amonty.wordpress.com)