At the center of the debate over efforts by policymakers to “stimulate” the economy with government spending is the issue of fiscal multipliers. Some economists argue that government spending can be a free lunch: an additional dollar of government spending increases GDP by more than one dollar. Other economists say that government spending is not so free: an additional dollar of government spending increases GDP by less than one dollar or even reduces it.

My non-empirically based view is that the mainstream media tends to treat the free lunch position as gospel. Why that appears to be the case I’ll leave to others to speculate, but it is decidedly irritating. Back in 2010, my colleague Alan Reynolds noted that a survey conducted by an economist at the Federal Reserve Bank of San Francisco counted several studies that concluded that the multiplier effect of government spending is less than one.

We can now add to the list another study that found a multiplier of less than one.

From a National Bureau of Economic Research working paper by economist Valerie Ramey:

For the most part, it appears that a rise in government spending does not stimulate private spending; most estimates suggest that it significantly lowers private spending. These results imply that the government spending multiplier is below unity. Adjusting the implied multiplier for increases in tax rates has only a small effect. The results imply a multiplier on total GDP of around 0.5.

Note: For readers who are interested in real world examples of how government spending hinders economic growth, check out DownsizingGovernment.org.

Another Log for the Government Spending Multiplier Fire is a post from Cato @ Liberty - Cato Institute Blog

When I think about taxes, my first instinct is to rip up the corrupt internal revenue code and implement a simple and fair flat tax.

When I think about Social Security, my first instinct is to copy dozens of other nations and implement personal retirement accounts.

Unfortunately, the political system rarely generates opportunities to enact big reforms that actually solve problems and increase freedom. Instead, we’re stuck with proposals that make things modestly better or modestly worse.

So you can imagine my sense of dissatisfaction that I’m getting peppered with questions about whether the one-year, two-percentage point payroll tax holiday should be extended.

But it’s more complicated than that. The Democrats in the Senate want to make the temporary tax cut even bigger and “offset” that tax cut with some soak-the-rich tax increases. Republicans, meanwhile, are frozen like deer in the headlights. They understandably don’t like the Democrat plan, but they seem reluctant to support anything else, not even a “clean” extension of the current policy.

Here are a handful of observations.

• The Democrat’s proposal for a one-year payroll tax cut financed by a permanent income tax hike on investors, entrepreneurs, and small business owners would be a big net negative for U.S. job creation and competitiveness.

• A “clean” extension of the payroll tax holiday would modestly improve incentives for work, but the temporary nature of the tax cut substantially weakens pro-growth effects.

• Ideally, the extension of the tax holiday should be financed by reducing the growth of federal spending.

• There are other tax cuts, such as permanent reductions in marginal income tax rates and/or permanent reductions in the double taxation of saving and investment, that would have a better impact on the economy.

• There are other tax cuts, such as expanded credits, deductions, preferences, exemptions, and shelters, that have no positive impact on the economy.

• A payroll tax holiday does not undermine Social Security since the Trust Fund is nothing but a big pile of IOUs.

• The best incremental reform would be a permanent reduction in the payroll tax, with the money channeled to personal retirement accounts. This would lower the tax burden of work while reducing the long-run burden of entitlement spending.

• This discussion of payroll taxes and incremental reform should not distract us from the enormously important issue of genuinely fixing entitlement programs, something that is needed to save America from Greek-style fiscal collapse at some point in the future.

So what does all this mean? Simply stated, there are many other fiscal reforms that are preferable, but a temporary extension of the payroll tax holiday is better than nothing—assuming, of course, it is not poisoned by accompanying class-warfare tax hikes.

The Less-than-Thrilled Case for Extending the Payroll Tax Holiday is a post from Cato @ Liberty - Cato Institute Blog

After three years and $4 trillion in combined deficit spending, unemployment remains stubbornly high and the economy sluggish. That people are still asking what the government can do to stimulate the economy is mind-boggling.

That the Keynesian-inspired deficit spending binge did create jobs isn’t in question. The real question is whether it created any net jobs after all the negative effects of the spending and debt are taken into account. How many private-sector jobs were lost or not created in the first place because of the resources diverted to the government for its job creation? How many jobs are being lost or not created because of increased uncertainty in the business community over future tax increases and other detrimental government policies?

Don’t expect the disciples of interventionist government to attempt an answer to those questions any time soon. It has simply become gospel in some quarters that massive deficit spending is necessary to get the economy back on its feet.

The idea that government spending can “make up for” a slow-down in private economic activity has already been discredited by the historical record—including the Great Depression and Japan’s recent “lost decade.”

Our own history offers evidence that reducing the government’s footprint on the private sector is the better way to get the economy going.

Take for example, the “Not-So-Great Depression” of 1920-21. Cato Institute scholar Jim Powell notes that President Warren G. Harding inherited from his predecessor Woodrow Wilson “a post-World War I depression that was almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit.” Instead of resorting to deficit spending to “stimulate” the economy, taxes and government spending were cut. The economy took off.

Similarly, fears at the end of World War II that demobilization would result in double-digit unemployment when the troops returned home were unrealized. Instead, spending was dramatically reduced, economic controls were lifted, and the returning troops were successfully reintegrated into the economy.

Therefore, the focus of policymakers in Washington should be on fostering long-term economic growth instead of futilely trying to jump-start the economy with costly short-term government spending sprees. In order to reignite economic growth and job creation, the federal government should enact dramatic cuts in government spending, eliminate burdensome regulations, and scuttle restrictions on foreign trade.

The budgetary reality is that policymakers today have no choice but to drastically reduce spending if we are to head off the looming fiscal train wreck. Stimulus proponents generally recognize that our fiscal path is unsustainable, but they argue that the current debt binge is nonetheless critical to an economic recovery.

There’s no more evidence for this belief than there is for the existence of the tooth fairy.

Not only has Washington’s profligacy left us worse off, our children now face the prospect of reduced living standards and crushing debt.

This article originally appeared in a PolicyMic debate between the Cato Institute’s Tad DeHaven and Demos senior fellow Lew Daly. Check out Daly’s piece here.

We’ve Had Enough Government ‘Stimulation’ is a post from Cato @ Liberty - Cato Institute Blog

I am debating the need for more government spending to goose the economy and create jobs over at PolicyMic.com. I argue that we’ve had enough government “stimulation” (see here). My opponent argues that the federal government hasn’t spent enough money (see here). Readers will decide the “winner” and can add their own two cents.

Debate on Government Stimulus is a post from Cato @ Liberty - Cato Institute Blog

…Apparently, when you are the District of Columbia public school system. The Washington Times reports today on a candle-light vigil beseeching the federal government for extra cash for new computers. The group organizing the vigil, OurDC, shares this “horror story” from former technology teacher Toval Rolston:

I’ve been in D.C. schools where the computers are so antiquated that you can’t even download a basic pdf file; our children don’t have the tools to compete in today’s high tech world.

The twin implications of this plea are that DC schools are underfunded and that more money will actually be spent wisely. The first statement is false and the second is decidedly unlikely. The last time I calculated total spending on K-12 education in DC, from the official budget documents, it came out to over $28,000 per pupil (the linked post points to a spreadsheet with all the numbers).

How do you manage to spend $28,000 per pupil and not manage to keep your computer hardware up to date? Or, for that matter, manage to have among the worst academic performance in the country? Maybe, just maybe, it has something to do with not being capable, or perhaps even inclined, to spend the money on what works.

The Washington Times, by the way, points out that OurDC is headquartered at the same address as the Service Employees International Union. Go figure.

When Is $28,000 per Pupil Not Enough? is a post from Cato @ Liberty - Cato Institute Blog

Last week in New York City, during my Intelligence Squared debate about stimulus, I pointed out that Germany is doing better than the United States and explained that they largely avoided any Bush/Obama Keynesian spending binges.

One of my opponents disagreed and asserted that I was wrong. Germany, this person argued, was dong better because it was more Keynesian thanks to “automatic stabilizers” that resulted in big spending increases.

This claim was made with such certainty that I wondered if I made a mistake.

Well, we were both right about Germany doing better. In the past few years, it has been enjoying yearly growth of about 3.5 percent while growth in the United States has remained below 3 percent.

But who was right about the key issue of whether Germany has been more Keynesian? At first, I was going to be lazy and not bother combing the data. But then I got motivated after reading an excellent post about Germany’s pro-growth reforms, written for National Review by Veronique de Rugy of the Mercatus Center.

So I looked up the data on annual government spending in the United States and Germany and discovered that I was right (gee, what a shock). As the chart shows, the burden of government spending has increased faster in the United States. And that is true whether 2007 or 2008 is used as the base year.

To make sure the comparison was fair, I sliced the numbers every possible way. But the results were the same, regardless of whether state and local government spending was included, whether TARP spending was included, which base year was selected, or whether I used annual spending increases or multi-year spending increases.

In every single case, the burden of government spending grew faster in the United States from 2007 to 2011.

This does not mean Germany is a role model. Government spending in Germany is far too high and it continues to grow. All we can say is that Germany is not going in the wrong direction as fast as the United States.

Oh, I suppose we also can say that I was right and my opponent was wrong. The United States has been more Keynesian than Germany.

Speaking of Germany, I combed my archives and found only one post that said anything nice about German politicians.

My other German posts mocked the country’s scheme to tax prostitutes, mocked the government for losing the blueprints for its new spy headquarters, mocked the government for a money-losing scheme to tax coffee, and even mocked the supposedly conservative Chancellor for wanting to impose new taxes.

So even though Veronique is correct about some positive changes, the Germans have a long way to go.

Germany’s Not a Good Role Model…Except When Compared to the Profligate U.S. is a post from Cato @ Liberty - Cato Institute Blog

I can’t look into President Obama’s heart, so I can’t tell you what motives are driving the American Jobs Act. I can, though, tell you this: One look at the facts about American education, and his proposal only makes sense if the goals are to energize union support, and perhaps use spending as some easy shorthand to tell voters that the President cares about kids.

The basic reality is that over the last several decades governments at all levels have conducted ever-bigger education money bombings with no positive academic impact. According to the Digest of Education Statistics, real per-pupil expenditures rose from $5,671 in 1970-71 to $12,922 in 2007-08 (the latest year with available data). On the federal level, between 1970 and 2010 per-pupil spending rose an astonishing 375 percent. Meanwhile, National Assessment of Educational Progress scores for 17-year-olds – essentially, our schools’ “final products” – were almost completely flat. More money did not buy better results.

What did it buy? Exactly what President Obama seems to want to protect: staffing bloat. Between 1969 and 2008 American schools went from having 22.6 students per teacher to 15.3. District administrative staff went from 697.7 students per employee to just 363.3. In total, students per employee dropped from 13.6 to 7.8, all while academic outcomes froze. We got lots of jobs – many unionized – but nothing of educational value.

There is simply no way to look at the data and believe that $30 billion for school staffing will improve education. So it must only be about jobs, and ineffectual jobs at that.

That “ineffectual” part is the economic key. Stimulus supporters argue that paying for any job is good because employed people spend their dollars. But they ignore that the money must come from somewhere, and that somewhere is ultimately taxpayers who would either spend it themselves – including investing in new or existing companies – or put it in banks that would lend it. So the money would be spent one way or another, only taxpayers have huge incentives to employ it much more efficiently than do public schools, if for no other reason than they did the hard work of earning it. In the aggregate, that means we’d be better off just letting taxpayers keep their ducats.

What we’ve tried already supports this. Contrary to what Dan Domenech writes, public schools have gotten oodles of bailout money. The original stimulus included roughly $100 billion for education, the bulk of which went to public K-12 schooling, and in 2010 the President signed legislation giving states another $10 billion to keep school employment rolls engorged. And did unemployment plateau at about 8 percent, as the Obama team projected? You know the answer.

How about fixing dilapidated school buildings? Again, money is not the answer, unless the question is how do you win union friends and influence voters.

As I testified in 2008, for years school districts had been spending more on maintenance and construction than it was estimated they needed to bring all schools into “good overall condition.” Yet conditions seemed to keep getting worse.

What’s the problem? First, districts often put off maintenance so that small problems become bigger. And second, they often spend lavishly on School Mahals, a tendency embodied by L.A. Unified’s $578 million Robert F. Kennedy Community Schools complex.

Of course, building something brand new, equipped with more superfluous lights and whistles than the original starship Enterprise, doesn’t make practical sense if you could keep the old buildings fully functional at a fraction of the cost. But practical and political are totally different animals. Keeping the boiler in good repair simply doesn’t make for politician-aggrandizing, ribbon-cutting photo-ops. But undertaking a big addition or renovation, which Obama’s bill would pay for, absolutely does.

And let’s not forget: All the labor would likely have to be hired at union rates, in keeping with standard federal requirements. So jobs yes, but not more jobs in exchange for market wages.

Ultimately, the President’s bill would do nothing for education and would hurt the economy, because government spending more almost by definition means a nation wasting money.

C/P from the National Journal’s “Education Experts” blog.

Jobs Bill Only Makes Political Sense is a post from Cato @ Liberty - Cato Institute Blog

Herman Cain probably had the best reaction to the President’s speech: “We waited 30 months for this?”

My reaction yesterday was mixed. In some sense, I was almost embarrassed for the President. He demanded a speech to a joint session of Congress and then produced a list of recycled (regurgitated might be a better word) Keynesian gimmicks.

But I was also angry. Tens of millions of Americans are suffering, but Obama is unwilling to admit big government isn’t working. I don’t know whether it’s because of ideological blindness or short-term politics, but it’s a tragedy that ordinary people are hurting because of his mistakes.

The Wall Street Journal this morning offered a similar response, but said it in a nicer way.

This is not to say that Mr. Obama hasn’t made any intellectual progress across his 32 months in office. He now admits the damage that overregulation can do, though he can’t do much to stop it without repealing his own legislative achievements. He now acts as if he believes that taxes matter to investment and hiring, at least for the next year. And he now sees the wisdom of fiscal discipline, albeit starting only in 2013. Yet the underlying theory and practice of the familiar ideas that the President proposed last night are those of the government conjurer. More targeted, temporary tax cuts; more spending now with promises of restraint later; the fifth (or is it sixth?) plan to reduce housing foreclosures; and more public works spending, though this time we’re told the projects really will be shovel-ready.

And let’s also note that Obama had the gall to demand that Congress immediately enact his plan – even though he hasn’t actually produced anything on paper!

And then, for the cherry on the ice cream sundae, he says he wants the so-called supercommittee to impose a bunch of class-warfare taxes to finance his latest scheme.

What began as tragedy has now become farce.

If you didn’t see it when I posted it a month or so ago, here’s the video I did last year when Obama was proposing a second faux stimulus. Now that he’s on his fourth of fifth jobs-bill/stimulus/growth-package/whatever, it’s worth another look.

Though I must confess that I made a mistake when I put together this video. I mistakenly assumed the economy would have at least managed to get back to a semi-decent level of growth. More confirmation that economists are lousy forecasters.

Obama’s Economic Policy: From Tragedy to Farce is a post from Cato @ Liberty - Cato Institute Blog

I recently posted four charts eviscerating Obama’s record on jobs.

My Cato colleagues, Caleb Brown and Austin Bragg, have a good complement to those charts. They’ve put together a short video looking at how government spending and regulation undermine job creation.

Caleb says he will be doing more excellent videos like this, which is very encouraging since there is so much more ground to cover — particularly when trying to educate people in Washington.

One thing he should explain is that jobs don’t exist without profits. As I explained in a New York Post column last year, employers “only create jobs when they think that the total revenue generated by new workers will exceed the total cost of employing those workers.”

This seems like an elementary observation, but it’s one that most politicians don’t seem to understand. Or don’t care to understand.

That certainly seems to be the case at 1600 Pennsylvania Avenue. The president will speak tonight and supposedly will propose a $300 billion plan. He’ll claim, of course, that this new “stimulus” package will boost growth.

But a look at the various components that reportedly will be in his plan doesn’t create a sense of optimism. Especially since it appears that he’s mostly recycling proposals that already have failed at least once.

Maybe the President should copy the policies of a former resident of the White House, who also had to deal with a deep downturn, but managed to produce dramatically better results.

Government and Job Creation: Help or Hindrance? is a post from Cato @ Liberty - Cato Institute Blog

President Obama will be unveiling another “jobs plan” tomorrow night, though Democrats are being careful not to call it stimulus after the failure of the $800 billion package from 2008.

But just as a rose by any other name would smell as sweet, bigger government is not good for the economy, regardless of how it is characterized.

Here are the most likely provisions for Obama’s new stimulus, as reported by the Associated Press, along with a grade reflecting whether the proposals will be effective.

• Payroll tax relief – C – This proposal won’t do any harm, but it probably won’t have much positive impact because people generally don’t make permanent decisions on creating jobs and expanding output on the basis of temporary tax cuts.

  But, to be fair, if the tax cut keeps getting extended, people may begin to view it as a semi-permanent part of the tax code, which would make it a bit more potent.

• Extended unemployment benefits – F – I agree with Paul Krugman and Larry Summers, both of whom have written that you extend joblessness when you pay people to be unemployed for longer and longer periods of time.

  And I recently produced a chart showing how long-term unemployment has jumped sharply since Obama entered the White House, a dismal result that almost surely is related to the numerous expansions of unemployment benefits.

• New-hire tax credit – D – This proposal actually would subsidize employment rather than joblessness, so it’s an improvement over extending unemployment benefits, but it’s unclear how the IRS can effectively enforce such a scheme.

  This approach was tried already, as part of HIRE Act of 2010 (which was infamous for the FATCA provision), and it obviously didn’t generate great results. Simply stated, giving special tax breaks to companies with high employee turnover is not an effective approach.

• School construction subsidies – F – The federal government should have no role in education. Period.

  That being said, the economic flaw of school construction spending-cum-stimulus is that government spending must be financed with either taxes or borrowing, both of which divert resources from the productive sector of the economy. Simply stated, Keynesian spending does not work.

• Temporary expensing of business investment – B – The current tax code penalizes new business investment by forcing companies to “depreciate” those costs rather than “expense” them, thus forcing companies to artificially overstate profits. Temporary expensing mitigates this foolish bias.

  But temporary tax cuts, as noted above, are unlikely to have a permanent impact on growth. Temporary expensing, however, will encourage companies to accelerate planned investment to take advantage of better tax treatment, so it can lead to more short-term economic activity (albeit perhaps by reducing economic activity in future years).

The only good news – at least relatively speaking – is that Obama supposedly will propose to misallocate $300 billion of resources, significantly less than what was squandered as part of the 2009 faux stimulus.

But the bad news is that the AP story also notes that “Obama has said he intends to propose long-term deficit reduction measures to cover the up-front costs of his jobs plan.” Translated into English, that means the gimmicks and new spending in the plan proposed tomorrow night will lead to proposed tax hikes at some point in the future.

More taxes and more spending. Hey, it worked for the Greeks, right?

Grading the Likely Components of Obama’s New Stimulus Plan is a post from Cato @ Liberty - Cato Institute Blog

Information about President Obama’s forthcoming “jobs” plan is so disappointing that even Keith Olbermann is mocking him.

And the saddest part has to be more spending on school infrastructure. As I pointed out last week, per-student spending on facilities has increased 150 percent over the last two decades, even after adjusting for inflation. And Andrew Coulson explained how public schools can spend so much and still have infrastructure problems: waste and incompetence.

But the president’s school construction plans are such a spectacularly sorry response to our Great Recession, Little Depression, malaise, what-have-you, that it deserves to be revisited with a pitch-perfect intro by Mr. Olbermann:

Olbermann Mocks Obama ‘Jobs’ Plan; Try Blenders, Not More School Spending is a post from Cato @ Liberty - Cato Institute Blog

Oh, dear. Oh, dear. No matter how many times economists debunk the broken window fallacy, not a natural disaster goes by that journalists don’t try to cheer us up by saying “at least it will stimulate economic growth.” This time it’s Josh Boak (no relation!), the economics reporter (!) at Politico, who was “educated at Princeton and Columbia.” And Sunday afternoon he posted this story:

Irene: An economic blow or boost?

The power outages and shuttered airports may stop the engines of commerce for several days, but Hurricane Irene might have provided some short-term economic stimulus as billions of dollars will likely be spent to repair the damage to the East Coast over the weekend.

Cumberland Advisors Chairman David Kotok saw the storm as likely jolting employment in construction, an industry paralyzed by the bursting of the real estate bubble in 2008.

“We are now upping our estimate of fourth-quarter GDP in the U.S. economy,” he said in an email Sunday. “Billions will be spent on rebuilding and recovery. That will put some people back to work, at least temporarily.”

Kotok expects GDP growth — which limped along at less than a percentage point for the first half of the year — to exceed 2 percent in the last three months of the year and potentially reach 3 percent.

Mark Merritt, president of crisis-management consulting firm Witt Associates, said the hurricane should provide a bump in economic activity over the next few months.

“After a disaster, there’s always a definite short-term increase,” Merritt said. “There will be furniture bought, homes repaired, new carpet, new flooring, all the things affected by flooding.”

The story quotes no economist, who might have pointed out that the destruction of homes, businesses, and other property cannot actually be good for the economy. As economist Sandy Ikeda summed it up last year, the argument is that “paying $100 to replace a broken window somehow creates more prosperity than having an intact window and spending that $100 on something else.” He goes on to ask, as many economists have: If destruction is so good for an economy, why wait for a hurricane or a bombing raid? Why not just bomb your own cities?

As Frederic Bastiat explained the “broken window fallacy,” a boy breaks a shop window. Villagers gather around and deplore the boy’s vandalism. But then one of the more sophisticated townspeople, perhaps one who has been to college and read Keynes, says, “Maybe the boy isn’t so destructive after all. Now the shopkeeper will have to buy a new window. The glassmaker will then have money to buy a table. The furniture maker will be able to hire an assistant or buy a new suit. And so on. The boy has actually benefited our town!”

But as Bastiat noted, “Your theory stops at what is seen. It does not take account of what is not seen.” If the shopkeeper has to buy a new window, then he can’t hire a delivery boy or buy a new suit. Money is shuffled around, but it isn’t created. And indeed, wealth has been destroyed. The village now has one less window than it did, and it must spend resources to get back to the position it was in before the window broke. As Bastiat said, “Society loses the value of objects unnecessarily destroyed.”

In the comic strip “Pearls Before Swine,” the nefarious Rat used the destruction-as-stimulus argument to defend his client’s blowing up downtown:

But that’s a comic strip. Journalists should do better. Please, call one of these economists. They can tell you that destruction is destructive. When property is destroyed, people have less wealth. The money they had been saving for a new business or a new computer or a college education, now they have to spend it on rebuilding what they had. That is not “a bump in economic activity.”

Hurricane Irene as Economic Stimulus is a post from Cato @ Liberty - Cato Institute Blog

Just last week, I made fun of Paul Krugman after he publicly said that a fake threat from invading aliens would be good for the economy since the earth would waste a bunch of money on pointless defense outlays.

Yesterday, there were rumors that Krugman stated that it would have been stimulative if the earthquake had been stronger and done more damage, but he exposed this as a prank (though it is understandable that many people — including me, I’m embarrassed to admit — initially assumed it was true since he did write that the 9-11 terrorist attacks boosted growth).

 But while Krugman is owed an apology by whoever pulled that stunt, the real problem is that President Obama and his advisers actually take Keynesian alchemy seriously.

And since President Obama is promising to unveil another “jobs plan” after his vacation, that almost certainly means more faux stimulus.

We don’t know what will be in this new package, but there are rumors of an infrastructure bank, which doubtlessly would be a subsidy for state and local governments. The only thing “shovel ready” about this proposal is that tax dollars will be shoveled to interest groups.

The other idea that seems to have traction is extending the current payroll tax holiday, which lowers the “employee share” of the payroll tax from 6.2 percent to 4.2 percent. The good news is that the tax holiday doesn’t increase the burden of government spending. The bad news is that temporary tax rate reductions probably have very little positive effect on economic output.

Lower tax rates are the right approach, to be sure (particularly compared to useless rebates, such as those pushed by the Bush White House in 2001 and 2008), but workers, investors, and entrepreneurs are unlikely to be strongly incentivized by something that might be seen as a one-year gimmick. Though I suppose if the holiday keeps getting extended, people may begin to think it is a semi-durable feature of the tax code, so maybe there will be some pro-growth impact.

In any event, we will see what the President unveils next month. I’ll be particularly interested in how his supposed short-run jobs proposal fits in with his long-run plan for dealing with red ink. He has been advocating for a “balanced approach” and “shared sacrifice” – but that’s Obama-speak for higher taxes, and we know that’s a damper on job creation and new investment.

As you can tell, I’m not optimistic. The best thing for growth would be to get the government out of the way. The Obama White House, though, thinks bigger government is good for the economy.

This stimulus video was produced last year and was designed for another jobs plan concocted by the Administration, but the message is still very appropriate.

Is Obama Really Going to Propose Another Keynesian Stimulus? is a post from Cato @ Liberty - Cato Institute Blog

I’ve poked fun at Paul Krugman for his views on health care and British fiscal policy, and I’ve semi-defended him about unemployment subsidies and housing bubbles.

Now it’s time for some more mockery.

Back in 2001, Paul Krugman received some much-deserved criticism for stating that the 9/11 terrorist attacks would be stimulative for the economy.

He committed the “broken-window” fallacy, explained more than 150 years ago by a famous French economist, Frederic Bastiat.

Breaking a window at the local bakery, Bastiat explained, might generate business for the town glazier, but only at the expense of some other merchant, like a tailor, who would have benefited if the baker didn’t have to spend money on a new window.

In other words, the destruction of wealth is not good for an economy. At best, it makes us poorer and then shifts how current income is allocated. This is why Bastiat wrote (perhaps predicting the emergence of Krugman):

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

But we have to give Krugman credit for a bizarre form of ideological consistency. He is willing to advocate bigger government, no matter how sloppy the reasoning or how quirky the rationale.

His latest outburst was to say on CNN how wonderful it would be for the economy if the people of earth mistakenly thought we were on the verge of an alien invasion, which would lead to lots of military spending.

He even cited an episode of Twilight Zone to justify his assertions. I’m surprised he didn’t also mention the 1996 film, Independence Day.

As I wrote in a previous blog post, this is one of those moments when your only response is to say “wow.” This is even worse than when Keynesians assert that it would be stimulative to pay people to dig holes and fill them in again.

For those who want more info on why government spending does not boost the economy in the short run, here’s my video on Keynesian economics.

And if you want to know why government spending does not boost the economy in the long run, here’s a video looking at some empirical evidence about economic performance and the size of the public sector.

Paul Krugman Meets E.T. is a post from Cato @ Liberty - Cato Institute Blog

I testified to the Senate Finance Committee today regarding federal spending and debt.

Here are some of the points I made:

• Last night, President Obama called for a “balanced solution” to our fiscal problems, including tax increases and spending cuts. However, CBO projections do not indicate that we face a “balanced” problem. Instead, projections show that the deficit problem is caused all on the spending side of the budget.
• The United States has sadly become a big-government country. Until recently, government spending in this country was about 10 percentage points less than the average of OECD countries. That smaller-government advantage has now shrunken to just 4 percentage points.
• In recent years, policymakers have given us the largest deficit-spending “stimulus” since World War II, yet we are suffering from the slowest economic recovery since World War II.
• Rising government spending suppresses GDP because the government’s “leaky bucket” gets leakier and leakier as spending increases.
• Leaders in Congress are talking about cutting spending by $3 trillion over 10 years, or roughly $300 billion per year. The result would be that spending would rise from $3.6 trillion this year to $5.4 trillion in 2021, rather than the currently projected $5.7 trillion. That would be only a 5 percent cut. Interest savings would reduce spending a little more—but, come on Congress, you can do better than that!

Senate Finance Hearing on Debt is a post from Cato @ Liberty - Cato Institute Blog

Even though he’s become more partisan in recent years, I still enjoy an occasional visit to Andrew Sullivan’s blog. But I was disappointed last night when I read one of his posts, in which he discussed whether government spending helps or hurts economic performance. He took the view that a bigger public sector stimulates growth, and criticized those who want to reduce the burden of government spending, snarkily observing that, “The notion that Herbert Hoover was right has become quite a dogged meme on the reality-challenged right.”

Since I’m one of those “reality-challenged” people who prefer smaller government, I obviously disagree with his analysis. But his reference to Hoover set off alarm bells. As I have noted before, Hoover increased the burden of government during his time in office.

But maybe my memory was wrong. So I went to the Historical Tables of the Budget and looked up the annual spending data. As you can see from the chart (click for larger image), it turns out that Hoover increased government spending by 47 percent in just four years. (If you adjust for falling prices, as Russ Roberts did at Cafe Hayek, it turns out that Hoover increased real government spending by more than 50 percent.)

I suppose I could make my own snarky comment about being “reality-challenged,” but Sullivan’s mistake is understandable. The historical analysis and understanding of the Great Depression is woefully inadequate, and millions of people genuinely believe that Hoover was an early version of Ronald Reagan.

I will say, however, that I agree with Sullivan’s conclusion. He closed by saying it would be “bonkers” to replicate Hoover’s policies today. I might have picked a different word, but I fully subscribe to the notion that making government bigger was a mistake then, and it’s a mistake now.

Andrew Sullivan Has No Idea What He’s Talking about, but I Agree with His Conclusion is a post from Cato @ Liberty - Cato Institute Blog

Based on this morning’s numbers, I’ve updated my chart showing what the Obama Administration said would happen with the so-called stimulus compared to what actually has happened. As you can see, the unemployment rate is about 2.5 percentage points higher than the White House claimed it would be at this point.

Since I just did an I-told-you-so post about Greece, I may as well pat myself on the back again (albeit for another completely obvious prediction). Here’s the video I narrated a couple of years ago on the Obama faux stimulus.

Heckuva Job on that Stimulus! is a post from Cato @ Liberty - Cato Institute Blog

Yesterday Case-Shiller released their monthly housing price index.  Surprise, it fell by 4.2% in the first quarter of 2011.  I’ve been predicting a decline of about 6% over the course of 2011 (might need to adjust that).  Of course, this should come as no surprise.  We’ve spent the last couple of years trying to re-create the bubble, with little success.  While there’s been a home-buyer tax credit, the largest stimulus has been extremely cheap credit on the part of the Federal Reserve.  The problem with all these subsidies is they ignore the fact that eventually the housing market will come back to fundamentals.  And those fundamentals are demographics and income.  You cannot over long periods of time sustain house price increases without increases in incomes.  Loose credit only gets you so far.  Prices have already fallen enough to pretty much wipe out the entire value of the home-buyer tax credit.

Even worse than putting off the inevitable correction, subsidies that maintain prices above construction costs result in additional supply being added to an already glutted market.  While housing starts are near historic lows – they are still positive.  And worse, they are higher in the very markets in which we don’t want more building.  That permitting activity is twice as high in Phoenix as in San Diego, despite being of similar size, illustrates the perverse incentives of trying to re-inflate the bubble via demand subsides.  In supply-constrained markets you simply maintain prices at unaffordable levels – San Diego is still 54% above its 2000 price level – while in easy-to-build markets you add to the glut – prices in Phoenix are now back to 2000 levels. 

House prices were always going to find their “true” bottom. The question was simply: did we want to get there right away, or drag out the process? Washington chose the course of dragging out the process, at considerable cost.  I believe dragging out the process has only further spooked potential buyers.  Any buyer today has to suspect that further price declines are possible.  We need to get to the point where the only direction is up.  We aren’t there yet.  Policymakers continue to ignore the basics of supply and demand.  Unfortunately the rest of us pay the price for their doing so.

How’s that Housing Stimulus Working Out for You? is a post from Cato @ Liberty - Cato Institute Blog

On Monday, a group of 41 Senate Democrats, led by Sen. Debbie Stabenow (MI) sent a letter to President Obama, praising his administration’s recent decision to abandon its erstwhile promotion of the three pending trade deals as “job creators” and instead warn Congress it won’t submit the pacts for a vote unless they can be assured that a stimulus-enhanced version of trade adjustment assistance will be renewed.

The letter contains much about the benefits of the program, with little mention of its costs to taxpayers and even less concern shown for the innocent consumers whose pockets have been picked for decades to maintain the jobs lost when trade is allowed to flow more freely. That’s pretty standard fare for protectionists, who rely on the hidden and dispersed nature of the costs to get support for their policies. What’s new about this situation is the ratchet effect — the base TAA program is still in place, so what they are asking for is a renewal of part of the stimulus as a pre-condition for supporting trade liberalization. Note that the stimulus changes included a removal of the requirement that job losses be linked to a trade agreement (a feature, not a bug of the program, according to the Senators).

Wait, did I say a renewal of TAA-plus would be a pre-condition for supporting trade agreements? Not necessarily. Note this telling paragraph of the letter:

While we the undersigned may have differing views on elements of the trade agenda – with some of us looking forward to supporting the pending trade agreements with South Korea, Colombia, and Panama, and others skeptical of the impact of the agreements -we are unified in our belief that the first order of business, before we should consider any FTA, is securing a long-term TAA extension.  [emphasis added]

As I’ve said repeatedly, I understand (even if I don’t support) the political calculation that TAA is necessary — and worth it– if it secures votes for trade liberalization. But reading between the lines, some of the letter signers have no intention voting for the trade agreements, even if the mega-TAA is approved.  What we have here is a reversal of the grand bargain on trade liberalization, that gave extra welfare to workers who lost their job because of freer trade in exchange for support for trade agreements that lowered trade barriers. That ‘grand bargain’ has been tenuous for years now, of course — witness the complete lack of movement on the trade agreements even after the 2009 enhancement of TAA, at least until recent months. But now, rather than using TAA to buy votes for trade liberalization, the administration and their allies appear to using pretty-much-assured votes for trade liberalization to buy TAA. As a Wall Street Journal editorial said on Friday, it’s extortion.

TAA Reversal on Grand Bargain is a post from Cato @ Liberty - Cato Institute Blog

The Labor Department released its latest job numbers today and they remind me of Clint Eastwood’s 1966 classic, The Good, the Bad, and the Ugly.

The good news is that the economy created 244,000 new jobs, the biggest gain in almost a year. And the jobs were in the productive sector of the economy rather than government, so the added employment means more taxpayers rather than more tax-consumers.

The bad news is that the jobless rate increased to 9.0 percent, up from 8.8 percent last month. This means that the number of people looking for work is increasing at a faster rate than the number of jobs being created.

The ugly news, at least from the perspective of the Obama administration, is that the latest data is yet another piece of evidence that the White House was grossly mistaken when it claimed that bigger government would translate into better economic performance.

The blue line in the chart below shows the administration’s prediction of what would happen to unemployment if the so-called stimulus was enacted. The dots represent the actual unemployment rate.

As you can see, the unemployment rate is easily more than two percentage points higher than the White House said it would be at this time.

Administration apologists respond by moving the goal posts, asserting that the original prediction underestimated the economy’s weakness and the unemployment data would have been even worse in the absence of all the spending.

Since economists are lousy at predicting the future, that’s a legitimate argument.

But is it an accurate argument? Since there’s no parallel universe where we can conduct policy experiments, there’s no way of proving which side is wrong. Nonetheless, this chart from the Minneapolis Federal Reserve Bank is rather revealing. It compares employment numbers after the deep recession of the early 1980s with the employment numbers from the recent deep recession.

Perhaps I’m biased and reading this chart incorrectly, but it certainly seems as if Reaganomics generated better results than Obamanomics. Maybe it’s time to realize that government is the problem, not the solution?

New Job Numbers is a post from Cato @ Liberty - Cato Institute Blog