We’ve Had Enough Government ‘Stimulation’
That the Keynesian-inspired deficit spending binge did create jobs isn't in question. The real question is whether it created any net jobs after all the negative effects of the spending and debt are taken into account. How many private-sector jobs were lost or not created in the first place because of the resources diverted to the government for its job creation? How many jobs are being lost or not created because of increased uncertainty in the business community over future tax increases and other detrimental government policies?
Don't expect the disciples of interventionist government to attempt an answer to those questions any time soon. It has simply become gospel in some quarters that massive deficit spending is necessary to get the economy back on its feet.
The idea that government spending can “make up for” a slow-down in private economic activity has already been discredited by the historical record – including the Great Depression and Japan's recent "lost decade."
Our own history offers evidence that reducing the government's footprint on the private sector is the better way to get the economy going.
Take for example, the "Not-So-Great Depression" of 1920-21. Cato Institute scholar Jim Powell notes that President Warren G. Harding inherited from his predecessor Woodrow Wilson “a post-World War I depression that was almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit.” Instead of resorting to deficit spending to "stimulate" the economy, taxes and government spending were cut. The economy took off.
Similarly, fears at the end of World War II that demobilization would result in double-digit unemployment when the troops returned home were unrealized. Instead, spending was dramatically reduced, economic controls were lifted, and the returning troops were successfully reintegrated into the economy.
Therefore, the focus of policymakers in Washington should be on fostering long-term economic growth instead of futilely trying to jump-start the economy with costly short-term government spending sprees. In order to reignite economic growth and job creation, the federal government should enact dramatic cuts in government spending, eliminate burdensome regulations, and scuttle restrictions on foreign trade.
The budgetary reality is that policymakers today have no choice but to drastically reduce spending if we are to head off the looming fiscal train wreck. Stimulus proponents generally recognize that our fiscal path is unsustainable, but they argue that the current debt binge is nonetheless critical to an economic recovery.
There’s no more evidence for this belief than there is for the existence of the tooth fairy.
Not only has Washington's profligacy left us worse off, our children now face the prospect of reduced living standards and crushing debt.
Photo Credit: Wikimedia Commons
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Guest Professor
Tad DeHaven
Cato Institute. Tad DeHaven is a budget analyst on federal and state budget issues for the Cato Institute. Previously he was a deputy director of the Indiana Office of Management and Budget. DeHaven also worked as a budget policy advisor to Senators Jeff Sessions (R-AL) and Tom Coburn (R-OK). In 2010, he was named to Florida Governor Rick Scott's Economic Advisory Council. His articles have been published in the Washington Post, Washington Times, New York Post, Wall Street Journal Online, National Review and Politico.com. He has appeared on the CBS Evening News, CNBC, Fox News Channel, Fox Business Channel, and NPR....
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The Discussion
Keynes did not call for fiscal stimulus any time there was an economic downturn, only those that didn't respond to monetary stimulus. The current one seems to qualify. When I looked at significant post WW II recessions, increased spending as a % of GDP was a part of every recovery.
In the early 1980's, we set post WW II records for spending as a % of GDP in FY 1981, again in FY 1982, and a third straight year in FY 1983. We did not stop setting new spending records until all of the 2.7 million lost private sector jobs had been recovered. Until commentators like this author want to explain to me how Reagan's record spending in these years was wrong despite the positive results, they have no credibility to me.
On the other hand we cut spending in FY 2010 and the recovery faltered.
Here I sit on Thanksgiving evening considering how to best put forth my thoughts on this matter.
For the last couple of years, during these tough economic times, whenever one of my clients has been unable to pay me my usual fee, I have accepted whatever was offered and asked them to help me in whatever way they can as I will be helping them.
Government codifies this arrangement. We pay into the government as we are able, and that money comes back out for the good of all. At least in theory. The problem is that the system has been corrupted by greed. It can be brought back.
I want to help my neighbors. I want to give them jobs. There is work that needs to be done in the infrastructure of the nation. I want my neighbors to do that work. That will be helping me as I help them.
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The thing is government spending can't be the engine of economic growth, I think that's something most of us can agree on. Public works, like tax cuts, are temporary solutions and should only be used when the situation calls for it. With that said, its a valuable tool that should not be dismissed.
Public works create jobs in a local economy, these workers have to eat and sleep somewhere and this creates demand for goods and services of the private sector. Ideally by the time the public works project is complete, the economy has been jump started by the extra economic activity, much like tax cuts are supposed to do.
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The oversight in this article is staggering. The author points to the two post-WW eras as times when government spending decreased, and economic activity flourished without mentioning that the U.S. emerged from both WWs with significant economic advantages and without mentioning the GI Bill as a form of stimulus. He mentions Harding's response in 1920-21 while calling for freer trade without acknowledging the fact that tariffs under Harding were the highest ever and without mentioning the staggering current US trade deficit. He mentions deregulation seeming to ignore what caused the current econ crisis.
What needs to be taken into account is the fact that economic conditions are not the same as they were 90 or even 65 years ago. Similar responses will not yield similar results.
This debate has served as a good reminder, to me at least, that the “pump-priming” true believers can never be wrong. Here’s how it works:
Recession hits. True believers argue for more spending.
Three possible scenarios:
1. The recession ends relatively quickly and sustained economic growth returns. True believers take a victory lap.
2. The recession ends but economic growth remains sluggish and unemployment high. True believers argue that government spending prevented a longer, deeper recession or even depression. True believers also argue that their original predictions of a stronger economic rebound would have come true had the government spent even more money.
3. The recession worsens and/or turns into a depression. True believers argue that the government simply didn’t spend enough money.
In scenarios 2 or 3, the true believers call for more government spending. Scenario 1 occurs. True believers take a victory lap. Otherwise, it’s back to scenarios 2 or 3.
Lather, rinse, repeat, (and continuously cite Mark Zandi despite the fact that his forecasts are about as accurate as a blind archer).
The true believers possess an almost child-like belief in the ability of “the government” to manage the needs and problems of 300 million individuals. Unfortunately, “the government” is not some altruistic and impartial wizard that can simply wave a wand and make the lame walk and the blind see (including Mark Zandi). Rather, “the government” consists of fallible human beings who make mistakes and pursue their own self-interest just like the rest of us. And they don’t possess magic wands – just the power to rob Peter in order to pay Paul.
Lew Daly argues that what the country needs is an FDR-styled “jobs program,” I’ll simply note that the word “boondoggle” was coined to describe New Deal jobs programs. Louis Armstrong, take it away...
http://www.leoslyrics.com/louis-armstrong/w-p-a-lyrics/
Note: For lots of information on how government spending siphons off resources from more productive to less productive uses, check out www.DownsizingGovernment.org.
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I've heard the absolute nonsense of "opportunity cost" before. I've listened and read patiently while some very literate and intelligent people try to show me how it works. The closest anyone came to convincing me was by showing me a study that proved that the opportunity cost of building yachts added 150 jobs to a closed economy while costing 100. Call me an optimist, but that sounds like a 50 job net gain with no loss at all. I'll take that kind of "cost" every day.
Until you can show me the difference between the "invisible hand" and any other blind faith religion, I am forced to relegate your economic nonsense into the same dustbin of insanity as "intelligent design" and "Geocentric Universe"
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The only way government can "create jobs"--at least the permanent kind--is to hire more workers itself. All CCC-type jobs and most stimulus jobs (which usually seem to be about The Infrastructure or Energy) will expire once the work is complete. Jobs can be "created" only by encouraging existing employers to hire or by helping more people to start their own businesses. Period.
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The Depression of 1920-21 and the solutions the administration at the time enacted may well have led to the Great Depression in 1929. That decade in general was marked by inequality, with the upper classes enjoying the prosperity the author of the article mentioned (the 'Roaring Twenties') while poor farmers, city dwellers, and WWI veterans suffered. The government got out of the Great Depression by spending money--when they stopped spending for a period in the '30s, the economy almost immediately tanked and only fully recovered after the enormous government spending on World War II.
Both debaters here make incredibly weak arguments. Both build their arguments on two pillars: an appeal to reason, and citation of a cherry-picked authority or two. Neither is particularly meaningful for such a complex problem. Do we ask individuals to debate whether it is reasonable to believe that smoking causes cancer? Or discuss the positions of a couple of random doctors? No! We inquire as to the consensus view of the mass of experts on the problem. So what do economists, as a group, think? Is there any more sensible strategy than following their majority opinions? There are plenty of large-scale surveys, e.g. the National Association of Business Economics http://www.nabe.com/publib/pol/11/08/index.html .
Tad, how is it that government debt and spending in this recession is siphoning off resources that would have been used for private sector use?
The Fed already bought US treasuries to inject money into the economy for private use, all the way to making interest rates practically zero. The government borrowing would take money out, looked at in a vacuum, except that this gives the Fed room to buy those newly issued treasuries and cause no net effect. So all you get is the same practically free money for the private sector that it wants, except with the additional aggregate demand from that spending.
So that's the capital side. That leaves the labor side of it. And it's pretty obvious that there is not shortage of labor.
Crowding out just doesn't apply here.
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James: Your question is a complete non-sequitur, but I'll answer any way. Health care costs have increased in part because of America's unhealthy lifestyles that contribute to high chronic disease rates (163 million cases in 2003, at a total cost of $1.3 trillion, according to Milken Institute). You should focus your ire on the sources of poor health, not Medicare, if you really want to bend the national cost curve on health care. As for education, naturally, since education is a positional good, we will have rising costs in an age of growing inequality. In any case, what, exactly, does Harvard tuition have to do with government "cartelization?"
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One of Tad's overarching theories, echoed by James in the comments, is that government spending always undermines the economy, either by "siphoning off" resources from more productive to less productive uses, or by crowding out more efficient private markets. This is not even good theory let alone history. It's untrue, of course, for any number of classic public goods, from national defense to public health. But the real blind-spot here is the importance of public investment for innovation, productivity, and economic growth. Public investments in research, education, and health were large factors in 20th-century productivity growth and, with that, in rising living standards. It is absolute folly to deny that government spending is, in many cases, a significant form of investment.
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It is interesting that Mr Dehaven would suggest policies of the single voted worst president in history. Hardin was profoundly corrupt. His policies were not the cause of the upturn: 1) economic growth was already occurring before he came to office, 2) the tax base actually expanded during his tenure despite the tax cuts, 3) he promoted disarmament. It never cease to amaze how these folks trot out falsity, and selective facts, to support their old tired ideology. Of the above 1 & 2 are not now occurring, and 3 is not acceptable to conservatives. Spending is the only way out of the economic mess we are in presently. Increase demand for goods and services by a fair tax policy and put people back to work.
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Point in this article I agree with: The deficit spending is the band-aid on the gross fracture in our economy. Point to make: The tax system is a great place to start. It has become increasingly obsolete as applied to our technology driven economy. The internet, use of bartering websites and development of interest specific networks allows people to utilize underground and shadow economies, bartering for goods and services. Eliminating the need for money and removing it's significance as ultimate manifest of wealth. Employers can be inclined to hire off the books, pay per project as individuals solicit their services, albeit legal or illegal through internet contacts, in theory reaching a global audience. In cyberspace, free competition lives and nobody can hear you scream.
Why not look at what worked in a more recent recession? In FY 1981 we set a post WW II record for spending as a % of GDP. We set a new record in FY 1982 and an even higher record in FY 1983. We did not stop setting spending records until ALL of the 2.7 million lost private sector jobs were recovered. It worked.
By contrast, we set a new spending record in FY 2009, President Bush's last budget year. Then, despite ARRA stimulus spending we actually cut spending in FY 2010, well before the economy had recovered the 8.8 million lost private sector jobs. The recovery faltered. This is not a failure of Keynesian economics. It is a failure to practice Keynesian economics.
In practice, President Reagan was a bigger practitioner of Keynesian economics than President Obama.
While in past economic downturns the discussion presented here would have merit, that is not the case today. Business needs confidence. Confidence that there will be demand for their product or service. The only way this confidence will be instilled is for the government to make a decision and do something. Sad to say, this will not happen given the current hyper-partisan extremes being taken. Political moderates on both sides need to take control, or perhaps we can break the mindset that voting for a non-partisan candidate is a wasted vote and start electing true non-partisans, people who are capable of doing what is best for this country rather than for their own political careers, to all levels of government.
I have to agree on some of your points; however, I cannot completely agree.
Take for instance your following comment.
"Take for example, the "Not-So-Great Depression" of 1920-21...Instead of resorting to deficit spending to "stimulate" the economy, taxes and government spending were cut. The economy took off."
This is misleading. It absolutely did take off but the "take off" led to disastrous consequences, namely the Great Depression. Deregulation and deficit spending done in moderation works. The key is moderation something we as a people seem to lack in all aspects of our lives.
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"How many private-sector jobs were lost or not created in the first place because of the resources diverted to the government for its job creation?"
Seriously? What are the economics behind this statement? The government borrowed money at a low interest rate in order to finance the stimulus. Much of the money went to help states avoid tax increases or public employee layoffs. Did the government crowd out spending for private sector teachers? Did they crowd out private sector fire departments? Private sector road building?
It's important to point out that your analysis flies in the face of probably 90% of economists. This is a radical article. It's not one side of the coin. It's the edge of the coin.
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