Tuesday, July 19, 2011

Spending More Just Doesn't Work

This is my Knoxville News-Sentinel article from July 3, 2011

Spending More Just Doesn't Work

Albert Einstein is reputed to have said that insanity is doing the same thing over and over and expecting different results. However, you need not be an Einstein to figure out that those arguing that the government didn't spend enough to stimulate the economy must be certifiable.

Yet this is the often-heard defense of government spending. We heard this with regard to the war on poverty and other failed government programs. We have heard it with education. It does not matter that there is no correlation between educational achievement and spending. It doesn't matter that the war on poverty destroyed poor families and dramatically increased out-of-wedlock births. It doesn't matter that TARP and stimulus did not lower unemployment.

The avowed solution is always "spend more."

The reality is that Keynesian macroeconomics has failed. Government spending is part of the problem, not the solution.

Government spending has to come from somewhere. If it comes from the private sector through raising taxes or selling government securities, it reduces the money that the private sector can spend and invest. If it comes from creating money, it causes inflation. There is considerable economic research showing that government spending stunts job creation as private investment - the fuel of job creation - falls.

Economist Martin Feldstein estimates that each dollar of deficit spending has added less than a dollar to gross domestic product. Since Keynesianism has given us more spending and less growth, it is now time to try something different.

First, we all seem to have conveniently forgotten that before any recovery can take place, people and businesses must shed their debt. Stimulus always fails in a recession because both households and firms reduce debt rather than expand demand or employment.

Once debt is reduced, the rival macroeconomic theory says that to grow the economy incentives need to be provided that are not temporary. Any change perceived as temporary will fail.

People and businesses will not alter their behavior due to temporary changes. Households who have less debt can be motivated to spend if their taxes are reduced. Businesses can be motivated to expand if regulatory burdens are lessened and corporate taxes are reduced. Investors will invest more if capital gains taxes are reduced. Jobs will not be exported if the government is less hostile to domestic businesses.

The Environmental Protection Agency is seeking to destroy jobs in the coal industry; the National Labor Relations Board is fostering a hostile U.S. work environment; increased costs are evident through Obamacare; the administration is threatening to increase taxes on the "wealthy." They all point to why the economy is not growing despite $2 trillion in "stimulus."

The actions taken by this administration have stunted any recovery. What is ironic is that economics tells us that we can have recovery without spending a dime. Isn't it time to test that theory?

1 comment:

Christine Robinson said...

Dr. Black, Another great post. It is refreshing to see truth in print. I just wish there was a share button so my friends could see this side of things.

Chris Robinson, Asheville, NC