Yesterday's disappointing news about the slight bump up in the unemployment rate has led to contradictory statements.
The Government Spending Debate
The outcome of the debt policies in Greece and Europe have made some politicians in the U.S. backtrack on their ideological position concerning the U.S. economic recovery. Austerity did not lead to market confidence and consequently an improved economy; it did the opposite. Cuts made unemployment soar.
The eurozone has an unemployment rate of about 11 percent. Why? They never really got out of the recession like the U.S. did for two main reasons.
Recently, U.S. House of Representatives Budget Chairman Paul Ryan and presidential candidate Mitt Romney have both backtracked on their economic views. Rep. Ryan said that we need cuts so that we don't have to do the Greek style austerity cuts. I don't think Rep. Ryan knows exactly what austerity means; cutting is austerity.
Candidate Romney even recently took the position that cutting government spending would hurt our economic recovery. Romney's chief macroeconomic adviser is Greg Mankiw, a professor of economics at Harvard and who also is a new Keynesian.
Unfortunately, deficit hawks and conservative fiscal ideologues refuse to accept that their ideas are misplaced in time. We want private sector investment but this isn't happening right now; the private sector is sitting on $2 trillion in cash reserves. Consequently, when spending decreases, GDP decreases and then so, too, do tax revenues and the national debt increases.
One of the main problems with our national economy is that we are in a liquidity trap. What this means is that even when the Fed lowers interest rates to zero or near zero, the private sector still doesn't spend. Spending is important for growth. If there is not enough spending, the economy won't grow. If there is no spending, the economy will contract and GDP will decrease. This is very bad. Cutting spending (public or private) isn't the solution to a jobs crisis.
A national economy is more complicated than a household economy. There are more than enough examples of how cutting spending in recessions has resulted in increased unemployment.
Recently, when people were unemployed, goods and services were not bought, and when goods and services weren't being bought tax revenues decreased further contributing to the debt. Moreover, the GDP also shrunk and this increased the debt to GDP ratio. Several Nobel Prize winning economists, chiefly Paul Krugman, reason that this scenario could have been avoided by an opposite policy of temporary government spending.
Government spending... that sounds scary. If done correctly, it's not scary at all.
The core issue in economic growth is one of spending. When there is a demand for goods and services, spending occurs; with increased spending a GDP grows. If there is no demand, there is no spending. A steady supply of money in people's pockets is necessary for people to act on their spending demands. Either the private sector or the public sector can spend. Right now, the private sector isn't.
Conservative economists often like to say that supply creates demand. It does sometimes when conditions are good; supply of a new product can (but not must) lead to demand. More importantly, no spending will occur if there is no money and there will be no money if people don't have jobs.
So, how do we get money into people's pockets?
In a healthy economy, the government should spend as little as possible. Too much or misplaced government spending in a healthy economy can crowd out private investment, which in turn decreases tax revenues and misses the opportunity to pay down public debts.
In an unhealthy economy, however, by definition the private sector isn't spending and unemployment is high. When unemployment is high, spending decreases, businesses contract, people are laid off and it creates a downward spiral. To keep the sale of goods and services flowing, which keeps out GDP high and people employed, someone or something needs to spend. Therefore, the government is the spender of last resort.
This is not socialism. This is a temporary injunction of money into a troubled economy to keep people employed, to keep them buying goods, and consequently to keep private businesses afloat. Socialism is something entirely different.
The government, as a spender of last resort, is a temporary fix and to be clear, yes, this increases the debt (but so do ill timed tax cuts.)
What we saw in Greece was the result of ideological decisions, not sound economic principle. This is going on here in the U.S., too.
Deficit hawks seemingly have a fear of data and reality, or maybe it is a blind adherence to a rigid ideology that does not accept that the best policy depends on the context. Whatever it is, their cute little saying that 'you don't decrease debt by spending' is just ignorant of how a complex economy works. There is good debt and there is bad debt. Good debt can create jobs, increase spending, increase the GDP and therefore increase tax revenues which then pays down the debt.
If we follow sound economic principle, we would expect that more stimulus would be pumped into the economy. If we follow political ideology, we will continue with very slow recovery.
Perhaps Republicans understand that the best policy depends on the context and not a rigid ideology. This suggests that there is a strong political argument for their position. Mitch McConnell said that his primary objective is to see to it that Obama is a one-term president. So, if the economy gets better, Mitt Romney will lose. If the economy stays the same or gets worse, Mitt Romney will win. Could all this misplaced economic ideology be political? Only Republicans and their conscience know.
Paul Heroux is a master's graduate of the London School of Economics and a master's graduate of the Harvard School of Government. Paul has written extensively on macroeconomic policy and is a consultant in private practice on program cost-benefit analyses. Paul can be reached at email@example.com.
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