Spend Less, Owe Less, Grow the Economy

If you are in any doubt that the direction in economic policy is away from a Keynesian perspective and heading elsewhere, let me draw your attention to a paper that has been put together by the Republican Party Joint Economic Committee in the United States. Here is the conclusion:

The current fiscal condition of the U.S. government is perilous. During fiscal year 2011, the CBO projects that federal spending will be 24.7% of GDP, well above the average of 19.4% of GDP for fiscal years 1947–2007, and will remain far above its post World War II average for the next decade. Moreover, the CBO projects that federal spending will increase to 35.2% of GDP by 2035 in the alternative fiscal scenario under current policies. The United States cannot maintain this level of federal spending—let alone allow it to escalate—without seriously damaging its economy.

The abundant empirical evidence is clear and irrefutable; increasing federal spending as a percentage of GDP will slow economic growth in the long term. Therefore, U.S. policymakers should embark on a fiscal consolidation program based on reducing federal spending as a percentage of GDP.

Keynesians warn that significant federal spending reductions now would weaken the current economic recovery. During the last two decades, however, numerous studies have identified expansionary ‘non-Keynesian’ effects from government spending reductions that offset at least some and possibly all of the contractionary ‘Keynesian’ effects on aggregate demand. In some cases, these ‘non-Keynesian’ effects may be strong enough to make fiscal consolidation programs expansionary in the short term as well the long term.

According to empirical studies, fiscal consolidation programs that (1) eliminate government agencies and programs; (2) cut the number and compensation of government workers; and (3) reduce transfer payments to households and firms have strong expansionary ‘non-Keynesian’ effects. Fiscal consolidation programs that reform government pension and health insurance programs for the elderly to make them sustainably solvent in the long term may also have strong positive ‘non-Keynesian’ factors even if reforms are phased in slowly, do not affect current beneficiaries, and do not significantly reduce outlays in the short term.

Obama Administration officials have emphasized the risk of starting a fiscal consolidation program now while ignoring the risk of delay. There are significant external risk factors to the U.S. economy in both the short run and the long run that cannot be foreseen, such as: (1) resurging price inflation, (2) loss of confidence in the U.S. dollar as the world’s reserve currency, (3) euro-zone sovereign debt defaults, and (4) war in the Middle East. But, the many examples cited in this commentary show that the United States will be in a better position to respond to any of these challenges by reducing federal spending sooner rather than later.

This is a measured very sober empirically-based study that reverses the entire direction of Keynesian-based policy. Whether this is the future of economic theory, it is the present of economic policy. We are looking at a world in which policy has run well ahead of the textbook theories economists now teach. If you have grown up on the C+I+G version of macroeconomics, then what you have learned has with near certainly passed its use-by date.

But as Keynes himself has warned, those vested interests remain entrenched. “There are not many,” he wrote, “who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest.” For all that, the problems that have stemmed from the Keynesian policies adopted during the past two years have the power to finally penetrate through to near on everyone that there really is the deepest imaginable problem with the way economies are conventionally understood.

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52 Responses to Spend Less, Owe Less, Grow the Economy

  1. rog

    Just confining myself to the tittle, how does less spending grow an economy?

    Not much point in going past the title, is it?

    Questions, without answers.

  2. Sinclair Davidson

    It’s called ‘investment’ – you might have heard about this concept?

  3. Rafe

    It is about the government pissing less of our money up against the wall.

    Try reading past the title rog:)

  4. JC

    Quodge:

    You never went past 9th grade so good on you for asking the question. We all fully encourage it. At least you’re trying to learn new things at times and boy there a lot of questions lined up.

  5. Skuter

    I am one of those economists raised on a diet of Keynesian economics. One of the worst things about it was that I have only recently discovered how badly classical economists have been misrepresented. The ‘academics’ who taught me either had no idea about classical business cycle theory or deliberately misrepresented it in order to push their own ideology. Shameful…now I am having to ‘unlearn’ that mindset. Nevertheless I have had my eyes opened to the rich literature that is out there and I am discovering just how sophisticated and diverse classical business cycle theory is.

  6. m0nty

    The CBO also found recently that the US stimulus has created 1.2M to 2.8M jobs, rising to 3.7M by the end of September.

    The second page of that document lists cutting public sector wages as a major priority.

    Decreasing the number and compensation of government workers A smaller government workforce increases the available supply of educated, skilled workers for private firms, thus lowering labor costs.

    That’s the underlying agenda of the GOP: to decrease the living standards of the American people so as to make American businesses more competitive with China et al. Meanwhile, tax increases for the rich are “off the table”, according to Boehner. Is that the new paradigm of economics: a race to the bottom, where all of the progress of the last century in expanding the middle classes is thrown away?

  7. JC

    MonTY

    It would be a great thing if you understand the subject and the topic being discussed instead of immediately going to rhetorical talking points ending up looking like a moron by shooting your mouth off.

    There is no room in the United States for the bloat in the public sector. The private sector simply cannot keep all those bozos employed at the same rates of head count or the same rate of pay.

    Public sector jobs pay around 47% more that equivalent private sector ones at the present time.

    If the states (and eventually the Federal government) doesn’t do anything about meeting this reality the US will go broke and end up like Argentina.

    The only choice available is to cut the numbers and the wage rates including pension entitlements of the public sector and as the economy expands those people will eventually get hired in the private sector and become productive citizens instead of what they are now leeching of the rest.

    Here’s hoping they succeed.

  8. JC

    If the road to prosperity was that we all worked in the public sector we’d all now be as rich as Buffet.

    Public sector bloat impoverishes the rest of us/them.

    Stop trying to pretend you’ve found some new economic theory, you dolt as you haven’t.

  9. daddy dave

    Monty, here are some facts for you to consider before you go making a fool of yourself.

    * there are 7 million fewer jobs in the US than when Obama took office;
    * trillions more in debt than when Obama took office;
    * inflation is taking off;
    * lifeguards in California make over $100K per year.

    Now, sorry… what was it you were saying?

  10. Michael Fisk

    John Kwiggin has a post up on MMT:

    1. Except during the period since the GFC, money creation has not been an important source of finance for developed countries

    2. Except under extreme conditions like those of the GFC, money creation cannot be used as a significant source of finance for public expenditure without giving rise to inflation and (if persisted with) hyperinflation

    3. Government deficits must be financed primarily by the issue of public debt

    4. The ratio of public debt to GDP cannot rise indefinitely, since governments will ultimately find it impossible to borrow

    5. The larger the deficits governments want to run during deficits, the larger the surpluses they must run in booms

  11. m0nty

    The only choice available is to cut the numbers and the wage rates including pension entitlements of the public sector and as the economy expands those people will eventually get hired in the private sector and become productive citizens instead of what they are now leeching of the rest.

    Right, so how do you think that’s going to go down with the American voters? If that’s what the GOP is going to the election with, they will get slaughtered. All Obama needs to do is point at whichever rabbit finally survives the primaries and say “This woman wants to deliver 15% unemployment… ON PURPOSE.”

    Job creation is usually a cornerstone for any political campaign. The GOP is going to the next election with an anti-jobs platform. It’s lunacy.

  12. daddy dave

    If that’s what the GOP is going to the election with, they will get slaughtered.

    That’s what they went to the mid-terms with, and they won in a landslide.

    This goes to show that you don’t understand American politics nor do you understand the merits of GOP fiscal policy.

  13. m0nty

    The GOP’s plan sounds suspiciously like the Irish austerity policy forced upon them by the EU after the banking scandal. The Irish don’t really have a choice to pay off the debts of the German banks, but the American voters have a choice about whether they take the hit for Wall Street.

  14. daddy dave

    The GOP is going to the next election with an anti-jobs platform.

    No it’s not.

  15. .

    Right, so how do you think that’s going to go down with the American voters? If that’s what the GOP is going to the election with, they will get slaughtered. All Obama needs to do is point at whichever rabbit finally survives the primaries and say “This woman wants to deliver 15% unemployment… ON PURPOSE.”

    Job creation is usually a cornerstone for any political campaign. The GOP is going to the next election with an anti-jobs platform. It’s lunacy.

    You barking loon.

    http://portalseven.com/employment/unemployment_rate_u6.jsp

    Obama is destroying jobs all on his own.

  16. daddy dave

    The GOP’s plan sounds suspiciously like the Irish austerity policy forced upon them by the EU after the banking scandal.

    You’re sitting on all the information needed to understand this, m0nty, but somehow you’re not quite putting it all together. The Tea Party want to implement the austerity package before they get into an Ireland/Greece style of jam.

    They’re headed toward the cliff, and some passengers want to take over the steering wheel and throw on the brakes.

  17. m0nty

    That’s what they went to the mid-terms with, and they won in a landslide.

    This goes to show that you don’t understand American politics nor do you understand the merits of GOP fiscal policy.

    I don’t think they ever got up and said to the electorate: “We are for 15% unemployment and cutting the average American voter’s standard of living.” That’s essentially what they’re saying now.

  18. JC

    Right, so how do you think that’s going to go down with the American voters? If that’s what the GOP is going to the election with, they will get slaughtered.

    Okay, say you. On the other hand the polls aren’t suggesting that and in fact the GOP is getting hammered for being too timid with the deficit!

    But in any event lets take your assumption to its ultimate degree of stupidity and ignorance. Either the politicians make the decision to retrench the bloated public sector or the capital markets will do it for them. In other words people simply will stop buying US bonds and therefore they will close the budget gap that way or move into hyperinflation like Germany in the 20’s as the central bank prints more money to buy the bonds.

    Either way you look it the adjustment to the US financial dislocation caused by too much spending is going to end. Now what the GOP is saying is lets do ourselves rather than have the hammer of the market crush us.

    Personally I’d take the GOP’s advice as it sounds far less aggressive and nasty. You on the other hand want to take the ‘Grecian’ route, which is to stick your dense head in the sand before the market closes your access.

    You haven’t chosen wisely MontY

    All Obama needs to do is point at whichever rabbit finally survives the primaries and say “This woman wants to deliver 15% unemployment… ON PURPOSE.”

    Not true. People understand that they need to stop the bloat. Osama Obama can of course campaign that way however I would strongly advise him not to as far too many Americans that don’t work in the public sector understand the consequences and not turn into a Kenya.

    Job creation is usually a cornerstone for any political campaign. The GOP is going to the next election with an anti-jobs platform. It’s lunacy.

    Umm no they are not. They are going to the election by telling the American people how things stand and what the ramifications are of following Osama’s objective of taking from the private sector and offering bribes to the moochers: his constituency. And Americans understand that is the one-way track to the poor house. Good luck with that MontY.

  19. daddy dave

    I don’t think they ever got up and said to the electorate: “We are for 15% unemployment and cutting the average American voter’s standard of living.”

    I can’t accept that you believe this crap. Admit it. You’re just trolling.

  20. JC

    I don’t think they ever got up and said to the electorate: “We are for 15% unemployment and cutting the average American voter’s standard of living.” That’s essentially what they’re saying now.

    MontY… America is at 17% unemployment now, you twit.

  21. daddy dave

    m0nty will now demonstrate further ignorance by complaining that the official US unemployment rate is 9 percent.

  22. .

    “We are for 15% unemployment and cutting the average American voter’s standard of living.” That’s essentially what they’re saying now.

    They are not. Obama has done enough of this himself, as did Bush in 2007-08. The Tea Party faction of the GOP oppose all of the policies that caused such a fall in the standard of living.

    If Obama didn’t smoke bin Laden, he was toast.

  23. m0nty

    You’re sitting on all the information needed to understand this, m0nty, but somehow you’re not quite putting it all together. The Tea Party want to implement the austerity package before they get into an Ireland/Greece style of jam.

    They’re headed toward the cliff, and some passengers want to take over the steering wheel and throw on the brakes.

    The problems with that are, as I said: (a) austerity tends not to fly with voters, (b) trickledown didn’t work so why would austerity, and (c) the Keynesian orthodoxy will have the advantage of Obama selling it.

    You may even be correct in your assertions about its efficacy, but I can’t see the US actually enacting austerity.

  24. m0nty

    I can’t accept that you believe this crap. Admit it. You’re just trolling.

    I have this theory, dave. Everyone is trolling. All the time. It works in a surprisingly large amount of social situations.

    You see what I’m saying though, don’t you? It’s kind of difficult to sell voters on austerity. It is bringing governments down in Europe, why would you willingly embrace it? Political suicide.

  25. .

    a, b and c are simply horseshit.

    a. People voted consistently for Howard here ebcause they literally said stuff like ‘the ALPm will fuck the economy”. The same people who voted for ‘economic conservative’ Rudd.

    b. Who fucking told you this? The US standard of living rose by considerable amounts after the Reagan and Kennedy tax cuts. Why do you think Reagan shat in the re-election. “Morning in America” “are you better off than four years ago” HELLO?

    c. He can’t speak in public without a teleprompter.

    , but I can’t see the US actually enacting austerity.

    Well neither can I, they are reprobate blockheads. That said, even Bubba and tin man Al made sound economics popular.

    Fucking trolling git.

  26. daddy dave

    m0nty, it would help if you separated the merit of the policy from its saleability. They’re not the same thing.

    As it happens, austerity is needed, and not only that, is quite saleable in America. They’re less into free rides than other Western societies and also less collectivist. Collectivism in industrialised countries tends to equal enthusiasm for big government.

  27. JC

    The problems with that are, as I said: (a) austerity tends not to fly with voters,

    Really? So you’re saying that Howard’s 96 election with the debt trucks and paying down Labor’s previous debt didn’t happen? He was so unpopular that Keating won in 96?

    (b) trickledown didn’t work so why would austerity, and

    There is no free market economist that has ever described rising living standards as trickle down. That term was adopted by the Demolition Party to criticize the GOP in the 80’s. Never really worked.

    (c) the Keynesian orthodoxy will have the advantage of Obama selling it.

    That sure is a winner.

    You may even be correct in your assertions about its efficacy, but I can’t see the US actually enacting austerity.

    Then the will go broke and end up in the poor house. You can’t avoid economic laws, MontY. If you have too much debt you end up puking it all up.

  28. daddy dave

    I have this theory, dave. Everyone is trolling. All the time.

    I’m not. Not here, anyway. elsewhere, I can’t make any promises.

  29. .

    Good point JC. It’s called economic growth, not “trickle down”. The Democrats took offence that wealthy people tend to be business owners and employ people, and that letting them reinvest was good for wages.

    Envy. We can’t let rich people get richer even if it makes workers proportionally better off.

  30. m0nty

    Oh come on dave, this whole site is a troll Venus fly trap. You blokes are never happier than when you’re piling on Roger or Steve or myself or some other leftie who wanders past. This thread could go on quite merrily for 200 posts with you all ganging up on me.

  31. .

    Monty,

    Austerity is not only popular, it works.

    Take for example semi democratic Britain vs despotic French Empire. Britain were austere and made credible promises to the bond market. Napoleon was not – result: France could no longer finance itself through bonds, whilst Britain had a low bond rate.

  32. JC

    And Americans bought that during the Clinton Administration too, Dot.

  33. tbh

    Going on a slight tangent, but stay with me here…

    One of the things I like the most about investing in the share market is that I get to participate in companies who productive things. They make stuff, they provide services, they employ people and they make profits that are distributed to their share holders, big and small.

    My point is that the private sector is the engine that provides prosperity in our society. The government has a role to play, but it should mainly be about providing a system where the most people can be the most productive and do so in a way that provides protection from coercion and fraud (through prevention and/or punitive action).

    Employing large numbers of public servants doesn’t provide prosperity. Their wages and salaries must be provided before and the two usual methods are taxation and public debt. Either of those things at too high a level takes too much money out of the economy that could otherwise be put to productive use.

  34. .

    m0nty Anna Winter drops in rarely, Dave Bath, sometimes FDB when he’s not back from the pub, Steve Munn outside of “Catholic hour”, can all be reasonable lefties, plus a few more, and we also tolerate conservatives like C.L and R.L. – rarely do they engender a pile on – an occasional spat with one person.

    You’re spouting the policies of Geraldine Ferraro and saying they’re enormously successful and popular.

    You’re off your head pal.

  35. .

    “And Americans bought that during the Clinton Administration too, Dot.”

    ‘sactly.

    Keating also tried to sell a pretty similar vision to Howard – except the voters decided to punish him for erring in 1995 with a stimulus package that upped the u/e rate and threw years of budget planning off the rails.

  36. .

    Besides the recent flirtation with Keynes – higher u/e, deflation and lower GDP in America – and lower capital investment here in Aus – exactly how it is meant NOT to work – this is what economists actually believe:

    http://en.wikipedia.org/wiki/Washington_Consensus

  37. .

    More specifically:

    http://en.wikipedia.org/wiki/Washington_Consensus#List_of_recommendations

    The consensus as originally stated by Williamson included ten broad sets of recommendations:
    1. Fiscal policy discipline;

    2. Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
    3. Tax reform – broadening the tax base and adopting moderate marginal tax rates;

    4. Interest rates that are market determined and positive (but moderate) in real terms;

    5.Competitive exchange rates;

    6. Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;

    7. Liberalization of inward foreign direct investment;

    8. Privatization of state enterprises;

    9. Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;
    10. Legal security for property rights.

    Notice that no 9. means that the US mortgage market never really conformed since policy both encouraged and enforced imprudence.

  38. m0nty

    m0nty, it would help if you separated the merit of the policy from its saleability. They’re not the same thing.

    As it happens, austerity is needed, and not only that, is quite saleable in America. They’re less into free rides than other Western societies and also less collectivist. Collectivism in industrialised countries tends to equal enthusiasm for big government.

    That may be true, but with unemployment already at X% (thanks JC), and X being rather high, voters are not going to like pushing unemployment up even further to X + 5 or whatever will satisfy the Tea Party. The economy already has cubic buttloads of structural unemployment from the private sector without the Government adding to it.

    No question that there has to be tough decisions made in the US at the moment. It’s like journos at Fairfax complaining about outsourcing sub-editors… how else does Fairfax survive when its revenues are being eaten away? Funny how the workers always seem to get the rough end of the stick though.

  39. JC

    They really are terrific principles to hold to. It’s pretty freaking shocking how anyone could oppose the consensus.

    MontY , which ones do you disagree with?

  40. .

    That may be true, but with unemployment already at X% (thanks JC), and X being rather high, voters are not going to like pushing unemployment up even further to X + 5 or whatever will satisfy the Tea Party. The economy already has cubic buttloads of structural unemployment from the private sector without the Government adding to it.

    This is a lie. Obama has made US unemployment worse and they oppose him.

  41. JC

    Funny how the workers always seem to get the rough end of the stick though.

    That’s actually not true about Fairfax MontY.The workers are NOT getting the short end of the stick. Some are to be sure. However what they are doing is trying to save money and use some or all of that money to increase content by hiring more quality journalists.

    Overall the efficiency, if it works, will add workers, not reduce numbers and in a macro sense the actual numbers may not change at all as the outside contractor will have to hire more workers to fulfill Fairfax’s needs.

    In fact if the strategy works and I have my doubts it will, but it works, the head count at fairfax will increase, there will be more content and the contractors will have hired more subbies.

    If it works everyone wins.

    Do you see how we’re not against “da worker” here. We want to see everyone winning and it would be best for the economy if Fairfax does succeed and it’s share price rises as everyone wins.

  42. m0nty

    They really are terrific principles to hold to. It’s pretty freaking shocking how anyone could oppose the consensus.

    You mean like the G20 leaders?

  43. JC

    Which of the 10 points do you disagree with?

  44. m0nty

    Overall the efficiency, if it works, will add workers, not reduce numbers and in a macro sense the actual numbers may not change at all as the outside contractor will have to hire more workers to fulfill Fairfax’s needs.

    In fact if the strategy works and I have my doubts it will, but it works, the head count at fairfax will increase, there will be more content and the contractors will have hired more subbies.

    Well no, you can’t take $15M of spending out of it and add workers, unless by that you mean adding more part-time itinerant workers than there were full-time salaried employees. Bigger headcount, smaller payroll, smaller effect on the economy. Pagemasters is well underway in the process of devolving sub-editing to the same status as fruitpicking, essentially, hiring kids off the street for weeks at a time with no domain knowledge of what they’re processing. It’s another example of the devolution of worker entitlements under current economic policies. Nothing to be proud of, everyone loses except those who own Fairfax shares (or maybe they just lose a little less).

  45. JC

    MontY

    The CEO said that he was going to use some of the savings to hire more content journos. Iof you think he’s lying then take it up with him.

    If your characterization of pagemasters is true then they will fail. I’m still calling the jury out on this one.

    I actually hope it succeeds but the mastheads need a ton of rework because their current leftwing/Green slime groupthink strategy is fucked.

  46. .

    You mean like the G20 leaders?

    That includes Wayne Swan.

    Their policies didn’t work. They should be humble and listen to years of study, theory, empirics and experience.

  47. m0nty

    Their policies didn’t work. They should be humble and listen to years of study, theory, empirics and experience.

    I don’t know whether you heard, but the Washington Consensus died in the arse in 2008. It was kind of a big year in economics.

  48. JC

    Which ones died in the arse, MonT.

    It seems to me there was some hope on the left they would do so, but it doesn’t see that they have in the US.

    Which ones? Which points died?

  49. m0nty

    I’m not an expert in the differences between the Washington Consensus and the Seoul Consensus, JC. I don’t think it’s a simple subtraction of bullet points. There seems to be less of an emphasis now on privatisation and more allowances made for targeted subsidies, for instance. I’d bow out and leave that one to the real economists, though.

  50. .

    I don’t know whether you heard, but the Washington Consensus died in the arse in 2008. It was kind of a big year in economics.

    No it didn’t, this is shamelessly dishonest. Ireland did not abide by 5., America and the rest of the PIIGS (and to a lesser extent, the UK and by contagion, iceland) by 1,2, 4 and 9.

    I’d bow out and leave that one to the real economists, though.

    Yes, you’re wrong. The Seoul consensus has already failed. The Washington consesnus brought us peace, stability and prosperity.

  51. boy on a bike

    Public vs private sector jobs in the US:

    According to a December report from the BLS, state and local government employers spent an average of $39.83 per hour worked ($26.24 for wages and $13.60 for benefits) for total employee compensation in September 2009. Total employer compensation costs for private industry workers averaged $27.49 per hour ($19.45 for wages and $8.05 for benefits), see chart above. In other words, government employees make 45% more on average than private sector employees.

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