Thursday, March 14, 2013

Cutting Government Spending is Not Austerity ... Unlike Raising Taxes, It's Necessary to Stimulate Sustainable Economic Growth

Ideas matter. Implementing good ones work to the benefit of We the People and implementing bad ones often do lasting harm to We the People.

But how to tell which are the good ones from which are the bad ones, that is the question. And the answer is that those advocating smaller government spending are good for a society and job creation, and those advocating more government spending are bad.

That may not be the politically correct answer to the above question, but it's the accurate one.

Government spending and taxes are two different ways of balancing receipts and expenditures, at least nominally. When President Obama talks of a balanced approach, he's saying let's tax the bad guys some more, but he speaks with forked tongue in that he's not advocating substantial reductions in government expenditures or entitlement reforms

The problem is that this Keynesian big government approach works to the very detriment of those it's intended to help. It's a job killer and and growth inhibitor, but so far it's been a popular vote getter too. So that's why we all need a lesson in basic economics.

Escape from Spending Hell says this:

"All hope is not lost. Amid the sequester smackdown with the White House, Republicans did something off-script: They called the Obama bluff. They let the sequester's spending cuts occur, and the apocalypse didn't descend. The only thing that cracked was the president's approval rating.

The sequester's big discovery was that spending reduction isn't a political third rail. But if the winds are starting to shift, Republicans are going to need all the help they can get to convince the American people that more cuts in spending will preserve and protect their economy.

Help is at hand—economist Alberto Alesina.

Mr. Alesina, a professor at Harvard University, may be the last economist that Democrats want to deal with at the moment Americans are finding sympathy for spending cuts.

Ever since Ronald Reagan legitimized the efficacy of tax cuts, Democrats have sought to discredit his idea and restore the New Deal theory of a Keynesian multiplier, which dates to 1931. It holds that more public spending will revive a struggling economy.

No president has believed more in the miracle of the multiplier than Barack Obama. Across four years he has led the country on a kind of Keynesian death march, pushing federal spending to 25% of GDP and producing weak growth. We're looking at four more years before the Keynesian mast unless the Republicans can offer an intellectually respectable alternative.

Mr. Alesina has identified the alternative. His, and others', work the past decade with how struggling economies revive suggests that the Obama spend-more solution is the opposite of what the U.S. should be doing.

There is general agreement on at least two things about the current U.S. economy. It is emerging from the deepest recession since the Great Depression, and its debt level is unsustainable. The path back to stronger growth, argues Mr. Alesina, is a combination of significant, permanent cuts in public spending and relatively small tax increases, if any. . . .

Mr. Alesina . . . wanted to answer the most basic question: What works?

"Adjustments based upon spending cuts . . . are much less costly in terms of output losses than tax-based ones. Spending-based adjustments"—that is, cuts—"have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments"—tax increases—"have been associated with prolonged and deep recessions."

The debate over "failed austerity" is misleading because it emphasizes spending cuts but rarely mentions tax increases. "Austerity" plans, the Alesina studies suggest, fail to revive growth when they too heavily rely on raising taxes on income and capital—as across Europe and now in the U.S.

There is no magic ride back to prosperity. The Alesina team is describing the least-bad antidote for the long-term poison of destructive national debt. Fiscal plans based on large, permanent spending cuts are associated with renewed growth more than any alternative policy mix that has been tried.

Indeed, spending cuts without big tax increases look to be the only thing that really works. . . .

The Patty Murray budget: A $975 billion spending cut and a $975 billion tax increase.

The Paul Ryan budget: $4.6 trillion of spending cuts and no new taxes beyond the fiscal-cliff increases.

Neither budget is anything the world has never seen. The available record suggests which of the two is the road to perdition."

Summing Up

The math is simple. The bigger the government take, the smaller the private sector.

The smaller the private sector, the less investment by individuals and businesses in sustainable job creation.

The fewer the number of jobs that are created, the higher the unemployment rate.

And the higher the rate of unemployment, the greater the continuing need for government redistribution programs for those people without jobs.

To repeat, the bigger the government take, the smaller the private sector.

And so on.

The conclusion is simple. Cut government spending, grow jobs, and increase government revenues as a result.

Then the country's debt and deficits can be managed successfully. But not until then.

And until that happens, job growth will remain slow --- too slow.

And our nation's debt and deficits will remain high --- too high.

That's my take.

Thanks. Bob.

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