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?