Thursday, February 19, 2009

What Economists Don't Really Agree On

A few days ago I posted a link to Harvard economist Greg Mankiw's blog post listing a number of economic principles about which economists generally agree. Number 4 on that list was,
4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
What I didn't include in my post was the following from Mankiw's post:
"Note that the proposition about fiscal policy (#4) does not distinguish between taxes and spending as the best tool for purposes of macro stabilization. Maybe that question should be added in a future poll. I doubt, however, that the answer would make it onto this list of widely agreed upon propositions."
Our government isn't very good at distinguishing between taxes or spending as the best tool either. What happened during President Bush's terms was a combination of both fiscal policies. Remember, the US was already in a recession when Pres. Bush took office. That recession was exacerbated by our last "worst economic crisis in decades" brought about by 9/11. The government responded by cutting taxes, increasing tax rebates to the poor, and increasing spending like never before.

Now we have a new "worst economic crisis in decades" and our government is responding in much the same way. Huge government spending coupled with tax cuts. A strategy destined to increase our national debt like never before. Again.

To those opposed to the huge increase in government spending, many are asking where were you 8 years ago when Republicans did the same thing. First, I think it's important to point out that even Republicans don't like national Republicans right now - largely because of the spending of the last 8 years. But perhaps more educational is to say that I suppose national Republicans are now doing exactly what national Democrats did during the President Bush years. I distinctly remember our current Speaker of the House Nancy Pelosi pledging on Meet the Press that Democrats would reinstate Pay As You Go spending habits should they retake Congress. She and her colleagues were outraged (outraged!) at the deficit spending that Republicans were doing.

The pendulum of power may have swung since then, but the economic policies, and opposing party political rhetoric, haven't really changed all that much.


Scott Hinrichs said...

One of the things that has disappointed me so much about the abhorrent spending binge of the the past few weeks is that I am absolutely certain that if we had a GOP president and congress right now, they'd be doing something substantially similar. The only difference is that the big payoffs would go to GOP cronies instead of Democratic cronies.

If we had ended up with McCain as president and a Democratic congress, there might have been a little less spending due to spats, and some of the money would have gone to GOP cronies. But the sum of the matter would be pretty much the same.

It really doesn't seem to matter which party is in charge. They're all going to spend like drunken sailors.

Unfortunately, most Americans are like our politicians. There is a total disconnect between government spending and paying for it. Otherwise, we'd be having something akin to Boston Tea Party events around the country.

Cameron said...

Unfortunately you seem to be absolutely correct - it doesn't seem to matter which party is in control, they both spend like mad.

I think it stems from the idea that increased government spending = increased boost to the economy.

But that's exactly the argument used 8 years ago, so I guess I don't understand all those people clamoring for more spending today in order to fix what happened over the last 8 years.

Charles D said...

Spending is not necessarily a good stimulus and neither are tax cuts. The efficacy of either depends on the details.

For example, if we give every family an $800 income tax cut, that will probably be used by most families to pay down debt. That money goes right to the bankers. Similarly giving businesses a tax cut on the theory that they will use that money to create jobs in the US is wishful thinking. Some may, but without strict controls (which Congress never seems to impose), they can do whatever they want with the money.

Spending on "defense" is not stimulative either. When Congress showers billions on weapons manufacturers to produce systems we don't need, that is not likely to be much of a stimulus either. The money would be better spent on alternative energy or transportation infrastructure where we get not only the boost of new jobs but an end result that strengthens the economy.

Cameron said...

Spending on defense - WWII - is largely credited with ending the Great Depression.

Families paying down debt increases the amount of discretionary spending that family now has each paycheck.

And banks not having money is kinda what started this whole mess in the first place.