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Showing posts with label keynesianism. Show all posts
Showing posts with label keynesianism. Show all posts
Op-ed at RealClearMarkets: Austerity Works: It's Time to Give It a Try

Op-ed at RealClearMarkets: Austerity Works: It's Time to Give It a Try

This piece is with my son Sherwin. The graphs are pretty powerful. The piece starts this way:
Austerity or growth, is that the choice facing Americans and others around the world?

The debate never seems to abate. European Union finance ministers last week gave Spain permission to delay cutting some government spending and reducing its deficit, though many such as The Economist magazine fear that even the cuts that will be made go too far. A similar decision may soon have to be made for Greece. Even though the pro-bailout parties won the June Parliamentary election, they too are asking for a two-year delay in cutting spending and reducing their budget deficit.

The Obama administration has put increasing pressure on German Chancellor Angela Merkel to ease up on Germany's austerity prescription. President Obama continually touts more government spending as the cure, and derided Republican "let's cut more" spending strategy as the cause of Europe's economic problems.

Last month, German Finance Minister Wolfgang Schäuble was having none of it, telling Obama to fix the U.S. deficit before giving Europe advice: "Herr Obama should above all deal with the reduction of the American deficit. That is higher than that in the euro zone." . . .

The Debate over Spain's Austerity Program heats up

The Debate over Spain's Austerity Program heats up

Reuters reports:

Recession-plagued Spain unveiled new austerity measures on Wednesday designed to slash 65 billion euros from the public deficit by 2014 . . .
The conservative leader announced a 3-point hike in the main rate of Value Added Tax on goods and services to 21 percent and cuts in unemployment benefits and civil service pay and perks in a speech interrupted by jeers and boos from the opposition. . . .
Madrid won softer deficit targets from its European Union partners this week and also negotiated rescue aid of up to 100 billion euros ($123 billion) from the euro zone's bailout fund for its crippled banking sector. . . .
The Economist magazine talks about the kooky claimed "Multiplier" effect from government spending. I am not thrilled by the increase in marginal taxes, but that isn't the concern of the Economist.
More important, this is incredibly counterproductive. The Spanish economy is imploding. Without the ability to offset these cuts with a very aggressive monetary policy, the multiplier on this austerity will be substantial. There can't be much confidence that this austerity plan will generate any fiscal improvement given the likely cyclical hit to revenues and the resulting impact on banks, which could well feed back into greater sovereign obligations. It's more economic pain for no fiscal gain. . . .
There are two problems with this claim. 1) It ignores that the money has to come from someplace. 2) The multiplier implies that government spends all of times money, but private individuals don't. Yet, as I have tried to explain many times before, people essentially spend all of their money. If you put your pay check in the bank, either you spend it on the mortgage or car or food or the bank buys bonds or lends out the money. To believe the typical MPC argument you would have to believe that saving is the equivalent to throwing money in a hole in the backyard. David Malpass says that this is a false austerity, that they are really just moving money to other areas of spending.

To Obama government money comes out of thin air


Obama on June 1, 2012 in Golden Valley, MN: I assume there are some folks here who could use $3,000 a year. Let's get that done right now. That means they're going to be -- you know, if you have $3,000 a year extra, that helps you pay down your credit cards, that helps you go out and buy some things that your family needs, which is good for business. Maybe somebody will be replacing some thingamajig for their furnace. They've been putting that off. But if they got that extra money, they might just go out there and buy that thing, right? . . .
Obama fails to understand that the money has to come from someplace. If government takes the money from some people and gives to others, why will that increase total spending.  If you put your pay check in the bank, either you spend it on the mortgage or car or food or the bank buys bonds or lends out the money.  To believe the typical MPC argument you would have to believe that saving is the equivalent to throwing money in a hole in the backyard. 
Bruce Barlett's Keynesian claims in the New York Times

Bruce Barlett's Keynesian claims in the New York Times

Bruce Bartlett wrote this in the New York Times.

Republicans have been warning about the loss of jobs from cuts in military spending for some time. At a hearing last October, the House Armed Services Committee chairman,Howard P. McKeon, a California Republican, said, “Defense cuts are certainly a path to job loss.” The committee’s blog often highlights the loss of jobs from military spending cuts. . . .
Historically, economists have believed that government consumption and investment spending has the same impact on jobs and growth whether it’s for military or domestic purposes. As Paul Samuelson, the Massachusetts Institute of Technology economist, put it in his best-selling economics text: “There is nothing special about G spending on jet bomber and intercontinental missiles that leads to a larger multiplier support of the economy than would other kinds of G expenditure.” . . . .
World War II ended the Great Depression. . . . .
Indeed, some economists have argued that military spending has in fact been the primary vehicle through which Keynesian economics has operated during the postwar era. The reason is that conservatives who routinely denounce government always give a pass to military spending. . . .
It is clear in today’s world that national defense does not consist only of bombs and rockets. Adequate public infrastructure, a well-trained labor force that can produce soldiers capable of operating high-tech weaponry, and a strong economy are as important as the traditional tools of war, or more so.

This strong Keynesian claim by him is very disappointing.  I wrote this on Bruce's Facebook page.
Bruce, what is all this Keynesianism that you are pushing these days?  Do you really believe that government spending increases wealth?  Don't you acknowledge that the money has to come from someplace else?  Why does moving money from where you and I would have spent it to where the government would spend it increases wealth?  Are you going to make some Keynesian claim about different marginal propensity to consume?  Don't you recognize that all the money people have is essentially spent?  If you put your pay check in the bank, either you spend it on the mortgage or car or food or the bank buys bonds or lends out the money.  To believe the typical MPC argument you would have to believe that saving is the equivalent to throwing money in a hole in the backyard.  I thought that the writing here is a bit overstated. "Republicans have been warning . . . Historically, economists have believed . . . ."  Have you heard of Milton Friedman?  All Republicans?  Why such categorical statements?

Government Deficits and GDP


 The OECD data is available here.  The relationship is still statistically significant even when Ireland and Iceland are removed.

Government Spending and Employment


 The OECD data is available here.  The relationship is still statistically significant even when Ireland and Iceland are removed.

Government Spending and GDP Growth

UPDATE: Obama continued to push claims that we need even more government spending at his press conference on June 8th:
. . . a strategy of "let’s cut more" -- so that you’re seeing government layoffs, reductions in government spending, . . .  then you can get on a downward spiral . . . 


 OECD data available here.  The relationship is still statistically significant even when Ireland and Iceland are removed.
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