Economic Growth Be Damned

After a depressing if one-sided account of the economic policies of the Obama Administration to date, Michael Boskin, Stanford economist, presents his alternative case:

Since World War II, OECD countries that stabilized their budgets without recession averaged $5-$6 of actual spending cuts per dollar of tax hikes. Examples include the Netherlands in the mid-1990s and Sweden in the mid-2000s. In a paper last year for the Stanford Institute for Economic Policy Research, Stanford’s John Cogan and John Taylor, with Volker Wieland and Maik Wolters of Frankfurt, Germany’s Goethe University, show that a reduction in federal spending over several years amounting to 3% of GDP—bringing noninterest spending down to pre-financial-crisis levels—will increase short-term GDP.

Why? Because expectations of lower future taxes and debt, and therefore higher incomes, increase private spending. The U.S. reduced spending as a share of GDP by 5% from the mid-1980s to mid-1990s. Canada reduced its spending as share of GDP by 8% in the mid-’90s and 2000s. In both cases, the reductions reinforced a period of strong growth.

An economically “balanced” deficit-reduction program today would mean $5 of actual, not hypothetical, spending cuts per dollar of tax hikes. The fiscal-cliff deal reached on Jan. 1 instead was scored at $1 of spending cuts for every $40 of tax hikes.

Keynesian economists urge a delay on spending cuts on the grounds that they will hurt the struggling economy. Yet at just one-quarter of 1% of GDP this year, $43 billion of this year’s sequester cuts in an economy with a GDP of more than $16 trillion is unlikely to be a major macroeconomic event.

I sincerely wish that those proposing more Keynesian stimulus would produce more actual data-based evidence for their prescriptions. I’ve seen the models. I want to see the evidence. I want them to explain Japan.

My view, as I have said before, is that I continue to believe that a properly timed and structured fiscal stimulus can increase economic growth in the short term and kick-start the “animal spirits” necessary for the private sector to take over and for the economy to grow on its own. Fiscal stimulus need not do so but it can. I also believe that the ARRA was neither properly timed nor structured and that representative democracies may be incapable of such swift and prudent action. I wish that we would return to a more truly Keynesian view of the government as the employer of last resort rather than as the consumer of last resort. But that’s another subject. I also think that billing wage subsidies for teachers, police officers, and firefighters as fiscal stimulus is loopy but that, too, is another subject.

Meanwhile, when does the short term, during which Keynesian stimulus can be effective, become the long term, when structural changes are needed? Are we there yet?

19 comments… add one

  • Drew

    Count me a Boskin-ite.

    The current “balanced approach” is a farce. Boskin cites the statistics. He cites the alternatives. And yet an irresponsible man at the till tells us he can’t move a battleship, airports will close, and most assuredly the masses will be eating dog food while “the rich” dine on lobster and caviar. And it gets dutifully reported by the media, and by foaming at the mouth types like Ed Schultz.

    Meanwhile, Rome burns. I don’t want to be Japan. Drew, Miachael, steve, Dave, I suspect jan etc will all do just fine. ice will continue to be frustrated, and the Average Joe completely hosed. This is a cross between ludicrous and mean spirited on the part of the left.

    I know I am more cynical than others here, but it comes from dealing first hand with, and forcing change in, entrenched dogma and organizational momentum. It can be done.

    Michael likes to chastise me as being blinded by ideology. He needs to look in the mirror. His basic worldview has been winning for decades now, especially the last 4 years. But we, and much of Europe, are broke. The ills intended to be cured are not, if not worse yet.

    Our firm does not do bald faced turnarounds. They are ugly as hell. Lot’s of broken dishes. But we do take rudderless ships and make them better. In my opinion, our country is somewhere between rudderless and a turnaround, and the clock is ticking. However, no one seems to own a clock. As I say, the left has been winning for about 50 years. But, in finance parlance, if we don’t restructure soon a lot of dishes are going to get broken. I’ve witnessed it and its not pretty. And here is a clue: the Kennedy’s, Heinz’s, Buffets, Obama’s etc won’t suffer a bit. The guys you on the left profess to care about will be like cattle led to a messy barn.

  • Why? Because expectations of lower future taxes and debt, and therefore higher incomes, increase private spending. The U.S. reduced spending as a share of GDP by 5% from the mid-1980s to mid-1990s. Canada reduced its spending as share of GDP by 8% in the mid-’90s and 2000s. In both cases, the reductions reinforced a period of strong growth.

    You know what is amusing? This is precisely the reason many use to explain the Clinton economic boom. But of course this time is different….it is always different when one side does not like a given policy that previously worked for their side.

  • jan

    I know I am more cynical than others here, but it comes from dealing first hand with, and forcing change in, entrenched dogma and organizational momentum. It can be done.

    Drew, sometimes pragmatism can appear cynical. The rose pedals social progressives are throwing at current-day practices/policies, though, are seen through myopic rose-colored glasses, IMO.

    What’s holding our fragile economy together is the enormous amount of printed money the fed has pumped into the economy through QE — something like $4 trillion to date, with the QE3 estimated to be throwing $40 billion into the feeding lines every month. This is not growth! It’s putting a small butterfly bandage on a huge gash, hoping the edges will somehow come together and heal.

    Taxing people more, ramping up more regulations, now that Obama has secured a 2nd term, opining for more social programs (100 city tour), first ignoring and then fear-mongering the sequestration implications, borrowing and creating more ‘funny’ money is all short term thinking, aiding and abetting (IMO) some kind of onerous crash in the near future.

    But we do take rudderless ships and make them better.

    And, that was part and parcel a defining skill set that Romney brought to the table, that somehow was lost in the deceptive campaign Obama put up, and the people bought.

    This is a cross between ludicrous and mean spirited on the part of the left.

    Amen. The left, though, is so unaware of it. Instead, they mock, hype, and oftentimes distort their opponents’ words, intentions, actions resulting in only increasing the tension between the two different ideologies. Lost is any cooperative efforts to find sensible solutions.

    For 6 years the dems have had a greater ratio of power — both arms of Congress in Bush’s last 2 years, total power in the Obama’s first 2 years, and the WH and Senate now for 2+ years, and yet they still heap maximum blame for the limping economy onto the republicans, totally discounting the fact that there has been no budget produced, only CRs, by the democratically-controlled Senate since a partial one was last passed in ’09. In the meantime, the deficit has increased by $6 trillion, while economic and job growth has stalled out. It’s been said to be the worse recovery in statistical history.

    Basically, our governance is inferior and lacking in so many ways! But, nevertheless, seems to be totally excused by the left, as they are far too busy blaming the right!!

  • Icepick

    Keynesian economists urge a delay on spending cuts on the grounds that they will hurt the struggling economy.

    I would just like the leftists to make up their mind. Is this a B+ economy or is it struggling so badly that any little thing (like the existence of living breathing Republicans) will send it into the toilet?

  • jan

    “Is this a B+ economy or is it struggling so badly that any little thing (like the existence of living breathing Republicans) will send it into the toilet?”

    …very funny, Ice. However, that is the goal Obama is currently obsessed with — to make the R’s extinct by 2014, by turning everyone (including themselves) against them. Even the dems are seeing this as his highest purpose — reviving the economy be damned!

  • Icepick

    I’m not joking.

  • jan

    Ice,

    It just sounded ‘funny’ to me, that’s all.

    In the meantime:

    The last time the DOW was here — October 11th 2007

    Dow Jones Industrial Average: Then 14164.5; Now 14164.5
    Regular Gas Price: Then $2.75; Now $3.73
    GDP Growth: Then +2.5%; Now +1.6%
    Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
    Americans On Food Stamps: Then 26.9 million; Now 47.69 million
    Size of Fed’s Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
    US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
    US Deficit (LTM): Then $97 billion; Now $975.6 billion
    Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion
    US Household Debt: Then $13.5 trillion; Now 12.87 trillion
    Labor Force Particpation Rate: Then 65.8%; Now 63.6%
    Consumer Confidence: Then 99.5; Now 69.6
    S&P Rating of the US: Then AAA; Now AA+
    VIX: Then 17.5%; Now 14%
    10 Year Treasury Yield: Then 4.64%; Now 1.89%
    USDJPY: Then 117; Now 93
    EURUSD: Then 1.4145; Now 1.3050
    Gold: Then $748; Now $1583
    NYSE Average LTM Volume (per day): Then 1.3 billion shares; Now 545 million shares

  • steve

    Oy. I would hope that Boskin would fail a student who wrote what he did. He neglects to mention that those countries who cut spending also devalued their currencies.

    “The U.S. reduced spending as a share of GDP by 5% from the mid-1980s to mid-1990s. Canada reduced its spending as share of GDP by 8% in the mid-’90s and 2000s. In both cases, the reductions reinforced a period of strong growth.”

    Cool. Two can play this game. I choose 1948-1959. Spending went from 11.8% to 18.8%. GDP nearly doubled, 257 billion to 490 billion.

    http://www.presidency.ucsb.edu/data/budget.php

    Look, I fully agree. We should spend what we need to spend on govt, and not a penny more. It is a good philosophical point. Figure out what we want govt to do, then pay for it. Still, I sincerely wish that those proposing spending cuts would produce more actual data-based evidence for their prescriptions.

    (The most interesting to me itemhere is that we were spending 23.5% of GDP in 1983. What were we spending it on? Medicare spending then was about 1.6% of GDP, now it is about 4%. Medicaid was half what it is now, as a percentage of GDP.

    Steve

  • Drew

    jan

    Thanks for the kind words, and from your lips to gods ears.

    steve

    “Still, I sincerely wish that those proposing spending cuts would produce more actual data-based evidence for their prescriptions.”

    With all due respect, this is the textbook response for “YOU GIVE THE BAD NEWS.” Its the left’s stock in trade. Its political. YOU GUYS are the bad guys. Kids are poisoned. Grandma eats dog food. But we have free beer if you vote for us. Economic reality be damned.

    No one wants to deliver the news that there is no more free beer, even if the bar is going broke.

    I’m still searching for an honest leftist……

  • steve

    Drew- Actually, it is just paraphrasing Dave’s comment. Most of my personal writings concentrate on cutting Medicare. As I have said many times here, cutting spending really means cutting Medicare. We need to cut it because it will bankrupt us if we don’t. What I am objecting to is the claim that cutting spending will necessarily result in growth. There are lots of counterexamples.

    Steve

  • Andy

    IMO the two biggest factors are these:

    1. Sclerotic and corrupt government in need of reform.
    2. A population who wants a lot more than we’re willing to pay for.

    So we get growing debt in perpetuity and a government that spends 2-3 times what other governments do for often worse outcomes.

  • jan

    Andy

    I would add to your 2nd factor, a population that not only wants more, and not willing to pay for it, but one who doesn’t think further than one step taken with their left foot. If they did, they could see the imbalances on the credit and debit side of the U.S. ledger, and be able to comprehend that the piggy bank of others cannot indefintely supply funding for their needs.

  • Drew

    steve

    As a business guy used to changing calcified corporate cultures you and I are in league about going after the big bucks. But my experience is that going after the big bucks is the hardest. So you go everywhere.

    So yes, Medicare is the Godzilla. But the real issue is an ethic of cost containment that permeates the whole. I will make you a gentlemen’s bet – dinner in Chicago. Aggregate all the savings from the lesser opportunities………..and they will exceed Medicare savings. That’s just my personal experience as a business owner. But it requires a mindset.

    Alas, I don’t think this bet will be resolved. Politics won’t let it. But if you get to Chicago again, I’ll still buy you dinner.

  • steve:

    I sincerely wish that those proposing spending cuts would produce more actual data-based evidence for their prescriptions.

    In fairness, he did. He cited Canada and Sweden, both of which cut spending and whose economies have grown strongly. I’ve seen lots of models but I haven’t seen any real world examples of countries that have spent their way to robust economic growth.

  • What I am objecting to is the claim that cutting spending will necessarily result in growth. There are lots of counterexamples.

    No, Dave raised a valid point in an earlier post, I think. There may very well be a point where government spending’s effect on economic growth reaches its maximum. Any point above or below that maximum point results in less growth.

    It is almost surely the case that we are past the point of maximum growth now.

    It also makes sense. Much of our spending is non-productive (see Dave’s pie chart).

    Defense spending: Non-productive
    Social Security: Non-productive
    Medicare: Non-productive
    Interest on the debt: Non-productive

    And by non-productive I mean it is spending that does not result in things like cars, books, televisions, computers, drill presses, lathes, jeans, dress shirts, and even services etc. Keeping a 79 year old person alive for another 6-8 months is not going to result in much more GDP relative to the amounts spent. Neither is a tank. Social Security is a transfer program so its impact on GDP is tepid at best.

    Put more and more spending into non-production and eventually you’ll be producing less and less.

    Most of my personal writings concentrate on cutting Medicare.

    So, after all that work trying to paint Boskin as an idiot you turn around and agree with him.

    Well done. Does it make you an idiot, BTW?

  • steve

    Steve V- I dont arbitrarily pick ten years of spending stats to “prove” my case.

    Dave- Given the number of recessions the world has seen, citing three recessions constitutes data- based evidence? There are lots of studies looking at many recessions. The data is decidedly mixed. Why didnt he cite this IMF paper, a more recent effort and we know that the most recent paper is always the best? (Sarcasm alert)

    http://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf

    Drew- Deal. Trying to talk wife into trip to go to Wrigley some time. Ideally, get to see them play the White Sox. The CBO has ben projecting our debt with two scenarios, current policy or an alternate one making assumptions based upon likely political actions. W/o controlling health care costs (Medicare mostly), we need massive taxation or massive debt. Link to CBO (older one but newer are not much different) and to pretty charts Frakt made from data.

    http://www.cbo.gov/publication/41486

    http://theincidentaleconomist.com/wordpress/new-federal-budget-charts-with-latest-cbo-data/

    Steve

  • sam

    @Steve V:

    Much of our spending is non-productive (see Dave’s pie chart).
    Defense spending: Non-productive

    I’d have register a small objection here. DARPA is funded the DOD, and I’m not sure I’d classify it’s spending as non-productive. See, inter alia, Prosthetic Limbs.

    And then there’s that little thing by virtue of which you can read this…

  • I’d have register a small objection here. DARPA is funded the DOD, and I’m not sure I’d classify it’s spending as non-productive. See, inter alia, Prosthetic Limbs.

    And then there’s that little thing by virtue of which you can read this…

    This topic was covered before (don’t recall if you participated). That you have two examples that are counter to the generalization do not disprove the generalization.

    For example, regarding the internet that is more of an completely unanticipated side benefit. A goof. To say we should spend trillions on the hopes we’ll get a goof again is…not good policy to say the least. And not to mention the fact that when you spend trillions on something like military eventually some politician may very well want to use that military….also not a good thing.

  • steve,

    Boskin provided two examples, one from the 1990 and one form the 2000s. Those two examples are of countries making structural changes to their spending policies…that our host here is also advocating. He also points to Canada and the U.S. for the same time period also pursuing similar policies.

    Regarding the Blanchard and Leigh paper, did you read it or did you just scan the abstract? And be honest?

    Really, the claim that they are just arbitrarily selected decades is complete Bravo Sierra.

    Also, he points to a paper that arrives at a similar conclusion.

    So your complaints about evidence is rather…lacking.

    And did you read that entire Blanchard and Leigh paper you are linking too? Quoting rather extensively from the conclusion:

    If we put this together, and use the range of coe fficients reported in our tables, this suggests that actual multipliers were substantially above 1 early in the crisis. The smaller coefficient we find for forecasts made in 2011 and 2012 could reflect smaller actual multipliers or partial learning by forecasters regarding the effects of fiscal policy. A decline in actual multipliers, despite the still-constraining zero lower bound, could reflect an easing of credit constraints faced by firms and households, and less economic sl ack in a number of economies relative to 2009–10.

    However, our results need to be interpreted with care. As suggested by both theoretical considerations and the evidence in this and other empirical papers, there is no single multiplier for all times and all countries. Multipliers can be higher or lower across time and across economies. In some cases, confidence effects may partly offset direct effects. As economies recover, and economies exit the liquidity trap, multipliers are likely to return to their precrisis levels. Neverthe less, it seems safe for the time being, when thinking about fiscal consolidation, to assume higher multipliers than before the crisis.

    Finally, it is worth emphasizing that deciding on the appropriate stance of fiscal policy requires much more than an assessment regarding the size of short-term fiscal multipliers. Thus, our results should not be construed as arguing for any specific fiscal policy stance in any specific country. In particular, the results do not imply that fiscal consolidation is undesirable. Virtually all advanced economies face the challenge of fiscal adjustment in response to elevated government debt levels and future pressures on public finances from demographic change. The short-term effects of fiscal policy on economic activity are only one of the many factors that need to be consid ered in determining the appropriate pace of fiscal consolidation for any single country.

    So it doesn’t quite say exactly the same thing that could be concluded from the abstract.

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