Sometimes you get a revelation. The heavens open up, the angels sing and you now know the truth. I have always wondered why the Obama Administration is full of smart people giving bad advice. This seems true in every area - now highlighted with the missteps on the Gulf oil spill - but is especially true regarding the economy. Few would doubt the brain power of Larry Summers, Christina Romer and their team. Yet they appear to be ignorant of basic economic principles and especially micro economics. It is if they have never heard of Adam Smith or if they have do not believe in him or economic principles. Then I heard an interview with a "democratic strategist" who said that we (meaning the administration) need to get the budget under control. There was way too much spending. But now was the wrong time to decrease spending. What was needed was to keep spending and even increase it while we were in the recession. I went Hallelujah! That explains it! You see I - and those like me - believe that government spending makes matters worse. The other side believes that it makes things better - or at least keeps things from getting worse. The other side does not believe in "crowding out". That is where government spending substitutes for private spending rather than augments it. When the government goes into the markets to borrow money in order to increase spending, it drives out private investment and borrowing. This reduces capital expenditures and translates into slower economic growth. This crowding out is highlighted by a recent study by Harvard economists who found that earmarks increased government spending but reduce sales, payrolls and capital expenditures by local companies. This means that government spending substitutes rather an complements local private expenditures. I have pointed out before how stimulus packages have failed to stimulate, how the trillion dollar increase in government spending has prolonged the recession, how government inhibits economic growth through disincentives and increases uncertainties. However, these are facts. Getting the economists on the other side to accept facts when it impinges on their faith has proved futile in the past. I doubt seriously if a study even by a bunch from Harvard is likely to change their minds.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com