Monday, April 4, 2011

Strategy for growth, employment, and deficit reduction


Google title to read entire op-ed.

4 comments:

Patrick_L said...

Sigh. Where to begin?

“Wanted: A strategy for economic growth, full employment, and deficit reduction—all without inflation.”

An interesting opener, since it opens all sorts of historical and international comparisons. For instance, nations that have successfully done this have largely been very small economies (compared to the U.S.) who have often devalued their currency to boost exports to create economic growth which enabled them to reduce their deficits, achieve full employment, etc. Unfortunately the U.S. can’t do this as much because we’re dependent on the economic benefits of being the world’s reserve currency. Conservatives cite a number of nations using 100% or near-100% spending reductions for deficit-reduction while achieving economic growth- failing to note that these nations’ have also often depended on inflation- which economists know is really a tax (and a bad one at that). In fact, a huge number of countries who have successfully achieved deficit reduction have done so through allowing inflation to increase dramatically. Also, many of the countries cited by conservatives as being successful models of fiscal consolidation (i.e. spending cuts) and economic growth (the holy grail!)- namely several Scandinavian countries- use explicit government policies to promote full employment. Just some thoughts that literally popped off the top of my head when reading this intro…

They emphasize correlations, patterns, and associations in depicting economic trends to justify policy prescriptions. Is it too much to ask for causation or empirical evidence? I guess so…

“To the extent that government spending crowds out job-creating private investment, it can actually worsen unemployment.” – Why does this ridiculous economic narrative keep on popping up? If government was crowding out private investment, then interest rates would be rising. Unfortunately for this idea, interest rates are at historically extremely low levels right now.

“Indeed, extensive government efforts to stimulate the economy and reduce joblessness by spending more have failed to reduce joblessness.” Wrong- the CBO has studied this issue using a variety of methods, and has found that the stimulus has created at least hundreds of thousands of jobs. http://www.cbo.gov/publications/collections/collections.cfm?collect=12
“Second, we need to lay out a path for total federal government spending growth for next year and later years that will gradually bring spending into balance with the amount of tax revenues generated in later years by the current tax system.” A system guaranteed to generate some of the lowest levels of revenue on record when the country is going through a demographic bubble with the baby boom generation? When health care costs in this country are rising to levels twice those found in other countries? When we have to pay the interest costs of the deficits accumulated during the Bush Administration? When we face the risk of a serious debt crisis in a matter of years, and even drastic spending cuts will take years to have a significant impact? When the National Academy of Sciences and National Academy of Public Administration in their analysis looked at a fiscal path that depended almost entirely on spending cuts (largely keeping the current tax levels) to stabilize the debt, and found that it would require very deep cuts in Social Security, Medicare, and Medicaid, and reductions of about 20 percent in all other spending areas- including defense, veterans programs, etc.?

Patrick_L said...

“There is no reason why government agencies—from Treasury and Commerce to the Executive Office of the President—cannot get by with the same amount of funding they had in 2008 plus increases for inflation.” How senile have these economists gotten? Apparently the demographic boom and economic hardships from the worst recession since the Great Depression don’t exist in la la world.

“The nearby chart shows an example of a path that brings total federal outlays relative to GDP back to the level of 2007—19.5%. One line shows outlays as a share of GDP under the CBO baseline released on March 18. The other shows the spending path starting with HR1 in 2011. With HR1 federal outlays grow at 2.7% per year from 2010 to 2021 in nominal terms, while nominal GDP is expected to grow by 4.6% per year” Uhm…H.R. 1 deals with the domestic discretionary side of the budget? To continue its trend you’d have to go into the mandatory side of budget- which is what every expert tackles to get deficits down. This has to be the stupidest hypothetical budget scenario I’ve ever seen. Also, it’s generally a bad sign when you’re forced to cite NOMINAL terms.

“Critics will argue that such a budget plan will decrease economic growth and job creation.” What? You mean the Federal Reserve, the IMF (http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf), and those with enough of a brain to look at what’s happening in the U.K. as we speak?

“Those who predict that a gradual and credible plan to lower spending growth will reduce job creation disregard the private investment benefits that come from reducing the threats of higher taxes, higher interest rates and a fiscal crisis.” Oh joy- we’re now supposed to depend on http://www.nationaljournal.com/economy/gop-prescription-spending-cuts-and-lower-wages-equal-more-jobs-20110325

It’s also interesting that the National Journal could only find one economic expert who’d agree with their policy prescription, even in a survey which included notable Republicans like R. Glenn Hubbard, Keith Hennessey, and Douglas Holtz-Eakin. http://www.nationaljournal.com/economy/economic-insiders-spending-cuts-not-the-most-urgent-priority-20110329

TJE said...

I thought you would like this one, Mr. L. Although Gary Becker is not a Hamilton College economist, he is a Nobel Prize winner.

Patrick_L said...

Yes, I do respect his achievements in the field of economics. I'm currently watching his lectures on human captial, http://www.youtube.com/watch?v=QajILZ3S2RE&feature=BF&list=PL9334868E7A821E2A&index=1 , part of the reason he received that Nobel Prize. But in this case he's clearly replaced his ideology for economic thinking. The notion that we can achieve fiscal balance without revenue increases is just not credible.

P.S. How much do respect Krguman's Nobel when it comes to his opinion articles? That's what I thought.