August 8, 2011

THE POINT OF A PEACE DIVIDEND IS THAT YOU GET TO STOP SPENDING MONEY:

Why government cuts won't hurt growth (Shawn Tully, August 8, 2011, Fortune)

Congress may have narrowly escaped a debt debacle last week, but it couldn't agree on enough cuts to satisfy Standard & Poor's, which downgraded U.S. sovereign debt after the deal's $2.1 trillion in proposed cuts came in below the $4 trillion the rating agency felt was necessary to warrant a triple-A rating.

Still, it's the beginning of a much needed shift towards fiscal austerity. But now economists and pundits are warning that curbing government spending now, with growth in a rut, is a major mistake. It's totally obvious by pure economic math, they argue, that lower federal outlays will shrink GDP.

Americans are hearing this argument from New York Times columnist Paul Krugman, his Princeton colleague Alan Blinder, and Fed chief Ben Bernanke, who recently cautioned that quick, severe reductions in government outlays could prove a job and growth killer. Supporters of President Obama, including Howard Fineman of the Huffington Post, worry that when the cuts take hold in 2012, the slowdown they'll inevitably produce could endanger the President's prospects for reelection.

But the Keynesian argument that lower government spending automatically hampers GDP growth, right now, is far from the sure thing its champions keep trumpeting. Many eminent economists, from Eugene Fama of the University of Chicago to Allan Meltzer of Carnegie Mellon, take a totally different view. And the utter failure of the $862 billion "stimulus" to produce a robust recovery should encourage Americans to listen carefully to the view that more spending did little or nothing to raise GDP in the past two years, and lowering it will no virtually nothing to hamper expansion going forward.

We have been running an enormous and very expensive experiment for the last three years," says Kenneth French, a professor at Dartmouth's Tuck School of Business. "Although the stimulus seems to have produced none of the effects predicted by its Keynesian advocates, they remain as adamant as ever about their policy prescriptions. And more and more of the press and the public seem to be buying their arguments. One wonders what evidence would make people question the conclusion that more government spending will improve economic conditions."


What has evidence to do with ideology?


Posted by at August 8, 2011 7:04 AM
  

blog comments powered by Disqus
« IT HAD BETTER BE GREAT: | Main | IT NEVER HAD ANYTHING TO DO WITH ECONOMICS: »