I agree wholeheartedly with just about one sentence in Doug Bandow’s op-ed in Forbes. The remainder illustrates the gulf that separates the two camps warring over the role, if any, for government spending in reviving our economy, now shambling along with little or no growth. On one side is Mr. Bandow, apparently arguing for “austerity”:
In July the New York Times published an unintentionally hilarious editorial contending that “Mr. Obama’s big mistake was to turn prematurely from the need for stimulus to a focus on cutting the budget.” The Times apparently missed the $1.2 trillion deficit the administration will run this year. Or the president’s future budget submission: the Congressional Budget Office estimated that the president’s program would raise accumulated red ink over the next decade from $3 trillion to an astonishing $6.4 trillion. Where is the radical budget-cutting in Washington.
A similar debate is occurring in Europe, with the contest presented as “austerity” versus “growth.” Yet many of the nations which practiced austerity have grown the fastest. Germany remains the continent’s powerhouse even though its post-2008 stimulus was far less relative to its GDP than in the U.S. and other European states. Both Germany and Sweden enjoyed strong growth as they brought their budgets into closer balance.
The balance of the op-ed consists of presenting the arguments against stimulus spending. The findings are generally summed up here:
Alas, the only thing that government “stimulus” stimulates is government. Valerie Ramey observed: “Increases in government spending do reduce unemployment. For all but one specification, though, it appears that all of the employment increase is from an increase in government employment, not private employment.”
For the counter-argument to Mr. Bandow’s case you can read just about any column or post by Paul Krugman.
I don’t find any general agreement on the meaning of the term “austerity”. In much of the Eurozone it appears to mean tax increases. For its advocates in the United States it appears that it means tax cuts and cutting government spending except military spending which should increase.
Both sides of this question distort, spin, and cherry-pick their findings to support their arguments. So, for example, proponents of stimulus point to the decrease in the number of state and local government employees as prima facie evidence for their case without acknowledging that the reason that these decreases are taking place is that by law their budgets must balance, that tax increases are becoming decreasingly efficient and/or politically possible, and that public employee employment contracts require them to increase employee pay. Their only real recourse is firing people. Additional federal stimulus spending will be used, then, for raises. That’s not an efficient stimulus.
Similarly, proponents of austerity assume that increasing GDP will lead to increasing employment. That has not been the case for years. Why would it become true in 2013?
Here’s the sentence I agree with:
Economic growth requires good spending, not more spending.
It would be nice if there were some agreement on what “good” spending is. That doesn’t seem to be the case. Additionally, I think that prescription applies to the private sector as well as the public. In theory, the private sector is compelled to make more prudent judgments than the public sector or lose their money. As Yogi Berra said, “In theory there’s no difference between theory and practice. In practice there is.”
Is buying a $25 million mansion in the Hamptons “good spending”? I seriously doubt that it does much to stimulate growth in the economy. Most of the money will just go to someone else who’s very wealthy. It’s just trading hats.