Ugly Modeling

Will spending cuts ruin or improve America’s economy?

In February, the Goldman Sachs economist Alec Phillips predicted on ABCNews.com that a Republican proposal in the House of Representatives to cut $61 billion from the federal budget in fiscal year 2011, would, if enacted, shave two full percentage points off America’s gross domestic product in the second and third quarters of this year. A few days later, The Washington Post described a new study by Mark Zandi, the chief economist at Moody’s Analytics and an architect of the 2009 stimulus package, a.k.a. the American Recovery and Reinvestment Act. Zandi’s amazing verdict: The spending cuts would destroy 700,000 jobs by the end of 2012.

After every newspaper had published the gloomy predictions, Goldman Sachs issued a “clarification” of Phillips’ analysis. Phillips now says he was misunderstood by journalists eager to spread a doom-and-gloom message and predicts the impact of spending cuts probably will be mild and temporary. Perhaps he was influenced by Federal Reserve Chairman Ben Bernanke, who testified in March at the Senate Banking and Urban Affairs Committee that Goldman’s numbers were incorrect.

Yet even this correction implicitly assumes that government spending is the source of all recovery. The logic, as with Bernanke’s and Zandi’s analyses, is that government spending cuts reduce overall demand in the economy, which affects growth and then employment. This argument ignores the fact that the government has to take its money out of the economy by raising taxes, borrowing from investors, or printing dollars. Each of these options can shrink the economy.

All these analysts also systematically ignore the fact that GDP numbers include government spending. When the federal government pumps trillions of dollars into the economy, it looks as if GDP is growing. When government cuts spending—even cuts within the most inefficient programs—aggregate GDP shrinks. 

But that’s misleading. If Washington spends $1 a year on a bureaucrat’s salary, for example, GDP numbers will register growth of exactly $1, whether or not the employee has produced any value for that money. By contrast, if a firm pays an engineer $1, that $1 only shows up in the GDP if the engineer produces $1 worth of stuff to sell. This distinction biases GDP numbers—and the policies based on them—toward ever-increasing government spending.

Furthermore, GDP does not capture changes in personal investment portfolios or changes in private research and development spending. In the last two years, corporate cuts in the latter area have been large but unaccounted for. Also not included in GDP: pension benefits and the U.S. Flow of Funds Accounts balance-sheet information from the Federal Reserve Board. That means that when it comes to GDP, states’ grossly underfunded pensions are off the books, along with the loans and purchases conducted under TARP.

Another problem with these analyses: Economists of all persuasions have proven to be really bad at predicting the future, especially when it comes to jobs. Take the stimulus. Forecasters at the White House and the Congressional Budget Office (CBO) predicted the stimulus package would create more than 3 million jobs. And in August 2010, the CBO estimated that the stimulus had indeed created between 1.4 million and 3.6 million extra jobs, thrilling supporters of economic intervention. But unemployment stubbornly remained around 10 percent.

What was wrong with the CBO’s numbers? “When the upper limit of your estimate is almost three times the lower limit, you know it is not a very precise estimate,” the George Mason University economist Russ Roberts pointed out in testimony to the House Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending in February.

The truth is that there is no way to know the real number of jobs “created or saved” by the stimulus. For that, the CBO would have had to collect data on output and employment while holding other factors constant. But the CBO didn’t do that because that’s different from its job of “scoring” the possible results of proposed legislation. As the CBO explained in a November 2009 report, “Isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about [the law’s] impact.” In other words, CBO number crunchers gave it their best guess before the stimulus and arrived at their subsequent numbers by applying their original prediction model. If the model is wrong, so are the numbers.

No one knows what economic output would have been without the stimulus, and no models can tell us the answer. As Roberts testified, “The economy is too complex. Too many other variables change at the same time.” 

Also, the Zandi and Phillips models are based on the Keynesian view that government spending produces recovery. According to that theory, $1 in government spending produces substantially more than $1 in growth, a phenomenon known as the “multiplier effect.” The Goldman Sachs study assumes a multiplier greater than three—i.e., more than $3 in additional GDP for each dollar of government spending. But a review of the empirical literature reveals that in most cases a dollar in government spending produces less than a dollar in economic growth. And these findings often don’t even take into account the impact of paying for that government dollar via increased taxes. 

The Harvard economists Robert Barro and Charles Redlick estimate that the multiplier for stimulus spending is between 0.4 and 0.7. In another study, the Stanford economists John Taylor and John Cogan concluded that the stimulus package couldn’t have had a multiplier much greater than zero. Even the multipliers used by Christina Romer, the former chairwoman of the White House Council of Economic Advisers, and Jared Bernstein, economic adviser to Vice President Joseph Biden, in their January 2009 paper “The Job Impact of the American Recovery and Reinvestment Plan,” ranged from 1.05 to 1.55 for the output effect of government purchases. More recently, the Dartmouth economists James Feyrer and Bruce Sacerdote, who supported the stimulus, acknowledged that it didn’t boost the economy nearly as much as the administration models claimed it would.

The use of these outdated models and unrealistic multipliers explains why Zandi was wrong about how many jobs the stimulus would create. He claimed “the country will have 4 million more jobs by the end of 2010” if the stimulus passed. In truth, by the end of 2010 total payroll jobs had fallen by 3.3 million, and the unemployment rate had risen from 7.8 percent to 9.4 percent. The administration’s post-facto claim is that unemployment would have risen even more without the stimulus. To argue this, they again must pretend that they know what would have happened in the absence of a stimulus.

Now what? Many economists and many members of the business community argue that recent policy changes have hampered investment, making a bad situation worse. The prospect of endless future deficits and accumulating debt raises the threats of increased taxes and of government borrowing crowding out capital markets, diverting resources that could be used more productively. As a result, U.S. companies are less likely to build new plants, conduct research, and hire people.

We have tried spending a lot of money to jump-start the economy, and it has failed. Now we need to cut spending and lift the uncertainty paralyzing economic activity. That approach will not just be more fiscally responsible. It will also empower individuals and entrepreneurs. And they are the only ones who can bring on a real recovery. 

Contributing Editor Veronique de Rugy (vderugy@gmu.edu), a senior research fellow at the Mercatus Center at George Mason University, writes a monthly economics column for reason.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • WH Public Relations||

    I don't see any broccoli in his soup

  • Corporate Drone||

    It's a broth made from John Boehner's tears.

  • Tony||

    We have tried spending a lot of money to jump-start the economy, and it has failed.

    Really? According to what standard? No it's not rainbows and lollipops, but it's odd for a libertarian to expect that out of government. We reversed a recession before it because a depression and are growing ever so slowly, pretty much in line with what you'd expect based on the amount of spending (most demand-siders say it wasn't enough to return to desired levels of growth).

    Now we need to cut spending and lift the uncertainty paralyzing economic activity.

    How do these two things go together? "Uncertainty" is a poll-tested Republican code word meant to make it seem like anything that's wrong economically is the fault of Obama not doing the Republicans' bidding. For shame.

    It will also empower individuals and entrepreneurs.

    Again, how will cutting spending do this? They're just waiting around to rid themselves of the shackles of the safety net and unemployment insurance before they feel "certain" enough to hire? We tried the supply-sider routine, if you hadn't noticed, and it proved to be the nonsense voodoo it is, several times over.

    What utter bullcrap.

  • Platypus||

    We reversed a recession before it because a depression and are growing ever so slowly, pretty much in line with what you'd expect based on the amount of spending..

    you KNOW this is incoherent, right?

  • Tony||

    No. Even if the economy were in better shape than it is now, you guys would no doubt have goalposts somewhere else.

  • Platypus||

    No. The stimulus was sold to the American people as a job-saving economy jump-starter. It failed. By any measure, it failed.

  • Tony||

    You're being disingenuous. I said the stimulus was numerically too small to fill the hole that was created. That would seem to imply that it helped some, but did not return to previous growth levels. That does not imply that anti-stimulus is the answer.

  • Platypus||

    How much would it have taken to "return to previous growth levels"? Two trillion dollars? Three? Do you even know?

  • Tony||

    Probably more than $3 trillion to get employment back to normal. Yes, the Bush financial crisis was a big one.

  • JoshINHB||

    Probably more than $3 trillion to get employment back to normal.

    So you want a $4t-$5t deficit?

  • some guy||

    Correction. Tony wants to pull value out of thin air. He thinks politicians are magicians.

  • ponchy||

    "Even if the economy were in better shape than it is now, you guys would no doubt have goalposts somewhere else."

    Dumfry, the obama administration placed the goal posts that were missed, not us.

    In the meantime, let's say it would take 15,000,000 jobs to get back to normal employment levels. That's about 5% of the population, so in reality that many jobs would put us at far lower than a normal unemployment rate. 3 trillion dollars/15,000,000 jobs = $200,000 per job, most of which will probably below average paying jobs. Even you seem to think stimulus is attached to a significant negative multiplier.

  • Tony||

    Well, a job isn't a single event. $200,000 per job seems cheap if those jobs last more than a couple years and wouldn't have been there otherwise. The job then causes purchasing power on the part of the employed person, i.e., is a source of demand. Increase overall demand and you get growth (and higher government revenue).

    Now explain what cutting government spending will accomplish.

  • 35N4P2BYY||

    "Now explain what cutting government spending will accomplish."

    It will take money out of the portion of the economy that produces less than it takes in (public sector) and allows the part that actually turns money into useful things and more money (private sector).

  • some guy||

    And when do we get to the part where someone has to pay back the $3 Trillion that was borrowed? Who pays it back?

  • Jason||

    $200,000 per job seems cheap expensive if since those jobs last more than only a few months to a couple years and wouldn't have been there otherwise.

    There, FTFY.

  • MJL||

    The financial crisis was AT LEAST a bipartisan effort. See this: http://www.snopes.com/politics.....credit.asp

  • some guy||

    4 Trillion dollars divided by 14 million unemployed people. You want to spend $285,000 per job? How is that even remotely reasonable?

  • Tony||

    Because it could be directed toward infrastructure investments and the like, in addition to shoring up employment, which otherwise would result in us hemorrhaging money anyway by lower revenues and increased social spending. Why are you guys talking about jobs as if they only last one year anyway?

  • ||

    You know, at some point we're just dealing with flat out delusion.

  • Mr. FIFY||

    Tony always laps up the Keynesian spoo.

  • Tman||

    We reversed a recession before it because a depression and are growing ever so slowly, pretty much in line with what you'd expect based on the amount of spending (most demand-siders say it wasn't enough to return to desired levels of growth).

    Unemployment is back at 9%. There is nothing supporting your argument that the Stimulus either a.) brought us out of the recession (we are by no means out of it) or b.) Did anything remotely helpful for employment. By any historical measurement you are WAY OFF.

    "Uncertainty" is a poll-tested Republican code word meant to make it seem like anything that's wrong economically is the fault of Obama not doing the Republicans' bidding. For shame.

    No, that's your definition that you use to frame your argument in a disingenuous way. "Uncertainty" has a very clear definition, and in terms of finance it's an investment killer. If the risk is too great, investors will simply hang on to their money. Trying to frame this term in a red/blue vantage point is patent bullshit.

    We tried the supply-sider routine, if you hadn't noticed, and it proved to be the nonsense voodoo it is, several times over.

    Oh, so when Bush had his recession in 2001, what do you think allowed us to exit said recession if it was not supply-side support?

  • Tony||

    I agree that the Bush near-depression was a big hit to employment. We're now adding private-sector jobs. It's obviously not enough for you guys, but all you're doing is complaining and making fantasy claims about how if we just cut taxes even more they'd come back.

    If we're concerned about uncertainty, how about a single-payer healthcare system? Take the burden off employers. Now explain why fiscal policy in one direction represents certainty and fiscal policy in the other represents uncertainty. Shouldn't it matter only that the policy is understood?

    I don't think you can demonstrate a relationship between the Bush tax cuts and the end of the 2001 recession--which was mild. These cuts are still in effect. Where are the jobs they are supposed to have created?

  • Observer||

    *If we're concerned about uncertainty, how about a single-payer healthcare system? Take the burden off employers.*

    And place it on whom?

  • Tony||

    Everyone universally. That's the point. Not much of a burden if it's shared by everyone.

  • Observer||

    So employers would still be burdened, just as a personal cost instead of a business one.

    Would this burden also be progressive? Meaning, the more you make the more you contribute?

  • Tony||

    It would be no more unfair than private insurance, wherein some pay more than they get, but are consoled by the fact that they are healthy. The only difference is it would be cheaper.

  • Observer||

    You didn't answer the question, would this burden be progressive, as stated above?

  • Tony||

    I think our tax code could stand to be more progressive, whatever we're buying.

  • Observer||

    Then an employer, pays this personal cost and likely more because business owners happen to earn more.

    This removes the burden how?

  • Tony||

    The burden is having to pay for a program for providing insurance in their business, or dealing with the risk of having uninsured employees. A single-payer solution is just the logical conclusion of the idea of health insurance. One big risk pool.

  • Observer||

    This removes the burden from the employer how?

  • Tony||

    The burden is having to pay for a program for providing insurance in their business, or dealing with the risk of having uninsured employees. A single-payer solution is just the logical conclusion of the idea of health insurance. One big risk pool.

  • Observer||

    *One big risk pool.*

    That a person must join, or they will be punished for non-compliance.

  • Big Cat Kahuna||

    it would be cheaper.

    No, it wouldn't. It would be far more expensive in the aggregate and the quality of healthcare would decline proportionately.

  • Tony||

    The evidence does not support your claim.

  • some guy||

    The evidence does not support your claim.

  • Tman||

    We're now adding private-sector jobs. It's obviously not enough for you guys, but all you're doing is complaining and making fantasy claims about how if we just cut taxes even more they'd come back.

    No, we've barely added jobs at all. 30,000 of the jobs from the last employment numbers were from a mass hiring by McDonalds. I notice none of you liberals were whining about "McJobs" when you saw those numbers, which doesn't surprise me considering who's in office. April marked 27 straight months of 8 Percent or higher unemployment. Whatever the hell it is that you think Obama "did" to "help" unemployment, it's painfully obvious that IT ISN'T WORKING.

    If we're concerned about uncertainty, how about a single-payer healthcare system?

    That's true that a single payer healthcare system would remove the "uncertainty". But what is certain is that health care costs would rise, and availability of services would diminish. That's not the kind of certainty that anyone is interested in.

    I don't think you can demonstrate a relationship between the Bush tax cuts and the end of the 2001 recession--which was mild.

    No, I can demonstrate it just fine, but I'm not going to waste my time trying to explain empirical data to you since I know you will never accept it and continue to ignore all the data placed in front of you such as the graph I linked to in the previous comment.

  • Mr. FIFY||

    How about we force American citizens to buy firearms, using the Commerce Clause as the reason?

    Not so hot about it now, are ya?

  • Rob||

    + Infinity

  • Tony||

    Let's repeal the 2nd amendment then we can avoid such reductios.

  • Observer||

    If we are going hyperbole, lets simply remove the bill of rights, it doesn't serve a purpose besides holding the government back from helping everyone.

  • Tony||

    If you've ever been to a poor inner city, you might question the wisdom of radical liberty with respect to gun ownership rights.

  • Observer||

    I have lived in a "poor", "inner city". We armed ourselves because when seconds count, the cops are minutes away.

  • Tony||

    If you've ever been to a poor inner city, you might question the wisdom of radical liberty with respect to gun ownership rights.

  • 35N4P2BYY||

    Why? Because the residents in the inner city should not be trusted with firearms?

  • Tony||

    Speaking of reductios... why not allow everyone the right to own a nuke? What, they can't be trusted with them? Why do you hate freedom?

    Sometimes reality intrudes in these things. Guns amplify fistfights to the level of fatality. Unless the NRA is paying you there's no reason you can't be for communities deciding prudent policy with respect to deadly weapons. The whole country is not a farm.

  • Observer||

    Nice string of straw men.

  • Tncm||

    Speaking of reductios... why not allow everyone the right to own a nuke? What, they can't be trusted with them? Why do you hate freedom?

    Nuclear weapons are already managed by individuals. There isn't some self-conscious blob called "government" that holds the key to nuclear destruction, just people. So yes, they should be allowed to own nukes.

    Sometimes reality intrudes in these things. Guns amplify fistfights to the level of fatality. Unless the NRA is paying you there's no reason you can't be for communities deciding prudent policy with respect to deadly weapons. The whole country is not a farm.

    My NRA check hasn't come in yet. Could you tell them to hurry it up?

  • Tncm||

    Speaking of reductios... why not allow everyone the right to own a nuke? What, they can't be trusted with them? Why do you hate freedom?

    Nuclear weapons are already managed by individuals. There isn't some self-conscious blob called "government" that holds the key to nuclear destruction, just people. So yes, they should be allowed to own nukes.

    Sometimes reality intrudes in these things. Guns amplify fistfights to the level of fatality. Unless the NRA is paying you there's no reason you can't be for communities deciding prudent policy with respect to deadly weapons. The whole country is not a farm.

    My NRA check hasn't come in yet. Could you tell them to hurry it up?

  • MJL||

    Stop with the bush near depression bullshit: http://www.snopes.com/politics.....credit.asp

  • Tony||

    Because Bush, during the 8 long years of his presidency, was absolutely powerless to do anything about Fannie Mae. Only Democrats can touch such programs. It's magic.

  • some guy||

    Because Democrats, during the past 2 decades, were absolutely powerless to do anything about Fannie Mae. Only Bush can touch such programs. It's magic.

    See? It works both ways. At least try to be consistent.

  • Tony||

    I'm fully aware that the actors were bipartisan in the various failures that led to the crisis.

    The underlying philosophy that led to it was supplied by one side more than the other, though.

  • MJL||

    Did you even read the post, tony? It's not magic, it's politics.

    http://www.snopes.com/politics.....credit.asp

    That dude from AEI predicted the coming problem, as did Ron Paul. It's kinda funny how many times, during 2008, we heard the "nobody saw this coming" crap.

  • Esteban||

    Really? According to what standard?

    Did the Stimulus (or ARRA) not happen in your fantasy land? $800 Billion in about 2 years is not a lot of money to you? How much have the TARP programs cost?

    How is it over there in Bizarro world?

  • Observer||

    *We reversed a recession*
    Please note this inclusive phrase.

    This alludes that the person feels as if they personally have an investment in the decisions made, and as such will react in a very personal way to ANY criticism. This much personal vestment, by any individual, will create an irrational response.

    Post at your own risk.

  • Tncm||

    *We reversed a recession*
    Please note this inclusive phrase.

    This alludes that the person feels as if they personally have an investment in the decisions made, and as such will react in a very personal way to ANY criticism. This much personal vestment, by any individual, will create an irrational response.

    Post at your own risk.

    I have a feeling that I and others are going to like you, Observer.

  • GMT II||

    Ah yes our lady in arms named Toni, after the killing of OBL, speaks for all of us to hear.

    We can debate who got us into the worse recession since the great depression, but there is no mistake about who is the leader of the worst recovery since the great depression. That person being Obama. Toni, you are so far up Obama's rear that you can see shrike's and MNG's feet. Chuckle!

    Be gald that your head is up Obama and not Michelle, since she likes her a big helping of tamales......so said the Prez last week while pandering for votes.

  • Max||

    Veronique is the tiken frog cunt. Be nice to her.

  • Platypus||

    Say, you're a real class act.

  • Max||

    Sorry, I meant "token."

  • Mr. FIFY||

    Yeah, you're sorry.

  • Observer||

    Veronique has a sexy brain.

  • Max||

    A brain with blinders really turns you on, huh?

  • Observer||

    We all have blinders on the brain.

  • Observer||

    I must admit, I have concerns that the economy wouldn't recover if there was less government spending. (Not defending it, I just have concerns.)

    Today, in schools, it is taught that you get a good education, and you'll get a good job.

    You don't earn, or work for a good education, you simply get it.

    You don't start a business, you don't create a job, you just get one.

    Even in college this is the standard thinking. Until this is adressed, I don't think a true recovery is likely.

  • Big Cat Kahuna||

    No government could ever address such problems. They are systemic and intimately linked to culture. The drive to "do more for the children" will never cease while underlying cultural forces--whatever their particular makeup--undermine those misguided efforts, especially when said programs exacerbate these problems and create others.

    ---

    The co-worker of a friend stated the other day that things will get better now that we've democratized health care. After a short silence I think he mentioned that the coffee is quite good in their break room.

  • sedition||

    perhaps someone has neglected to tell the Australian government that spending cuts = less growth. Looking at the quick numbers for last nights Budget:
    2011-12. deficit 49 Billion AUD. growth 2.75%. projected spending cuts 22.5 Billion.
    2012-13. deficit 26.5 B. Growth 4.15%. projected spending cuts 28.8 B.
    2013-14. surplus. 3.5 B. growth 4%.

    *Disclaimer. Yes the government may be bad at projecting growth, may not keep its spending promises, most of the growth comes from a commodities bubble etc. but is is interesting that the most 'left' Labour government in a generation is linking less spending with more growth

  • Tncm||

    Jesus Christ Tony, again? I've already spent five pages of wasted words on trying to explain to you just how much of a disingenuous, ignorant stooge you are when it comes to economics. You never bothered to offer a meaningful response to any of it. Instead, you played a game of appeal to authority ("Friedman says X, the Austrian School is heterodox"), post hoc rationalizations ("The stimulus helped the economy because otherwise it would've been worse"), and your typical jabs at me being an ideologue. You are such a poor debater that Paul Krugman would blush if he ever read any of the garbage that you pass off as intelligent discourse.

    So you know what? I'm done. Talking economics with you is just as fruitful as discussing Euclidian geometry with a two year old.

  • A two year old||

    That, sir, is an insult!
    *throws a rattle at you*

  • JoshINHB||

    You are such a poor debater that Paul Krugman would blush if he ever read any of the garbage that you pass off as intelligent discourse.

    Have you ever read Krugman?

  • bill woolsey||

    It is sad when my fellow libertarian economists are so wrong.

    Cutting spending and taxes will likely have little impact on spending and so sales of goods and services, and will have a positive impact on productive capacity.

    Cutting spending and leaving taxes unchanged, and so reducing government borrowing will probably reducing spending on goods and services in the short run, but have little effect in the long run. This, however, is certeris paribus. If the Fed undertakes sufficient quantitative easing (creating new money to purchase long maturity bonds) then the short run decrease in spending can be avoided. As always, such quantitative easing needs to be reversed before the long run comes about.

    And finally, cutting government spending and reducing the creation of money will reduce spending and so sales of output. In the short run this will almost certainly reduce production and employment. In the long run, it will reduce money prices and incomes. Sadly, recent evidence suggests that long run can be quite distant.

    My preference is modest tax cuts and deep cuts in spending. And sufficient quantititive easing--money creation--to increase total spending on goods and services approximately 7% over the next year and then to maintain the growth rate of spending on goods and services (GDP) at 3% per year thereafter forever.

    As far as I am concerned, GDP measures spending on consumer goods and services, capital goods, and government goods and services. I don't think the pensions matter. Government spending may be waste, but how much the government pays tells us alot about opportunity cost. Spending on research and development should count as investment. I will look into that.

  • Libertard||

    Government R&D is tainted. Tainted! Who better to study the health effects of smoking than tobacco companies? They are the EXPERTS.

  • Draco||

    Veronique,

    Here is where you are wrong:

    Yet even this correction implicitly assumes that government spending is the source of all recovery. The logic, as with Bernanke’s and Zandi’s analyses, is that government spending cuts reduce overall demand in the economy, which affects growth and then employment. This argument ignores the fact that the government has to take its money out of the economy by raising taxes, borrowing from investors, or printing dollars. Each of these options can shrink the economy.

    First, it's not "government spending" that's the source of recovery, it's increasing the size of deficits, which can just as well be achieved by tax cuts as by government "spending." (And of course, ultimately it's the entrepreneur that sources the recovery, but he can't do that without money, and I'm speaking at the macro level as you are.)

    Second, it is not true that government spending has to "take money out of the economy." Every dollar added to deficit is one dollar of net financial assets injected into the private economy. That dollar goes to Granny's social security check (with which she buys groceries) or to the contractor repairing roads at the government's behest (with which he pays his men who buy sandwiches and cell phones). It is not burned or buried. When you say it is "borrowed" you are sometimes correct, but it doesn't matter - bonds are another form of money, and both the dollar and treasury bonds are obligations of the US government (one bears interest, the other doesn't). When you say it is "printed" you are correct. But that's what it always is.

    Taxes are a mechanism for regulating aggregate demand, not for raising revenue for the government to spend. And "borrowing" is a mechanism for maintaining interest rates - not for raising revenue for the government to spend.

    All of this is why the Keynesian view is correct in a fiat currency environment. And it's why the Keynesians at Goldman and elsewhere are correct about the negative effects that massive reductions in the deficit will have on growth when official unemployment is still at 9%.

    You need to read more Randall Wray, and less Stephen Moore. As much as I agree with your politics, and Stephen Moore's, and Pat Toomey's, and Paul Ryan's, etc. your monetary theory is wrong, and so your macro-economics is wrong.

    The only danger to over-large deficits is inflation - and that's not a danger at 9% unemployment. And increasing the deficit (which must be done to reach full employment) can be done without "government spending" per se - it can be done by further cutting taxes.

  • mofo||

    " Every dollar added to deficit is one dollar of net financial assets injected into the private economy."

    And this money comes from nowhere with no concequences whatsoever?

  • Draco||

    It literally comes from nowhere, as Bernanke himself has explained, literally from computer keystrokes.

    As I explained, the consequences are potential inflation. Taxes exist, ultimately, as a tool to pull back (destroy) money that was created and dispersed during the time of recession. If you don't contract deficits during expansion (which may require collecting more tax revenues), you will have inflation. That's the hard part to all of this - to act in a counter-cyclical manner requires discipline during booms. I'm not saying our politicians have that. I'm merely explaining how the monetary system works.

    And to be clear, while I think Wray understands as well as anyone how our monetary system works, I reject his politics. We need to combine the correct macro and monetary understanding with the politics of liberty. That's my position.

  • mofo||

    Hmm, sounds like bullshit to me. Here is what i think:

    If you create a new dollar (by whatever means you do so) there must be an associated new good or service that was created at some point or else you create inflation (more dollars chasing the same amount of goods).

    So when the Government spends its newly created dollar it is doing one of two things 1) It is spending away the deflation that would have happened had the economy grown (in the form of new goods and services being created) but the monetary supply been held constant. or 2) It is spending inflation into existence by creating more new dollars than the amount of new goods and services that were created.

    Either way, the dollar itself may come from nowhere, but it does not come into existence consequence free. You can argue that those consequences can be positive, which i think you are doing, but i think you are also falsely implying that actual wealth comes from nowhere when you say "Second, it is not true that government spending has to "take money out of the economy." Every dollar added to deficit is one dollar of net financial assets injected into the private economy." No, every dollar added to the deficit is a dollar taken from somewhere else, and maybe that taking is helpful.

  • Tncm||

    Oh dear God, another MMT nut. Can you and Tony just go to RevLeft or something and leave us alone?

  • Draco||

    Who exactly is "us?"

    I've been hearing "then move to another country!" from non-libertarians for many years when I argue in favor of liberty. Do libertarians, in contrast, often tell people to "go to another web site?"

    One reason I come to Reason.com is that, compared with some other forums, this isn't just an echo chamber for numbskulls. But for that to be the case, you have to have occasional opposing or diverging viewpoints.

  • mofo||

    Also:

    "First, it's not "government spending" that's the source of recovery, it's increasing the size of deficits ... (And of course, ultimately it's the entrepreneur that sources the recovery, but he can't do that without money"

    Why? Why cant the entrepreneur do what he does with the moeny already in exsistance? You seem to be implying that money printing, and only money printing will create a recovery, why would that be so?

  • ||

    In May of 1939 Roosevelt’s own Treasury Secretary admitted that the runaway spending had been a failure. “We are spending more than we have ever spent before,” said Henry Morgenthau, “and it does not work…We have just as much unemployment as when we started…and an enormous debt to boot!”

    http://collectingmythoughts.bl.....te-at.html

  • nike shox||

    is good

  • قبلة الوداع||

    thank u

  • منتديات العراق||

  • MTS Converter||

    Thank you.

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