I suppose it is no surprise that the Cato Institute would oppose government spending. That it would choose to protest government stimulus in a full-page ad in the Wall Street Journal, is a little more surprising. What is really worth noting is that they state, "Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth," and then support the statement with a long list of people who support that statement. My question for the Cato Institute: Where are all the Yale and Harvard economists on this issue?
The ad begins with a quote from the President, "There is no disagreement that we need action by our government, a recovery plan that will help to jump start the economy." Then Cato begins their ridiculous disagreement: "With all due respect,Mr.President,that is not true.
Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.
The undersigned include two members of the faculty of my not very prestigious undergraduate alma mater, Metropolitan State College of Denver. Not exactly A-class economists.
Let's look at their arguments. I do think that most economists would agree that the government needs to spend, if no one else will. When things seize up, as they have, the government is the only one with the purse big enough, and the responsibility to move the economy along by spending.
What led to delays in recovery from the Great Depression were attempts to balance the budget which required increased taxation. And Japan's "Lost Decade"? Government inaction was the culprit there. The belief that things would get better without intervention was the problem then, and it is the reason the US government is choosing to act as quickly as possible. Many economists will tell you that if recovery comes swift, it will be in large part because of fed action.
Now, to the belief that tax cuts cure all, we know it's not true. I'd love to shed my "tax burden" as well, but reducing taxes is not going to get us out of this hole. Tax cuts for individuals tend to be saved. How much of last year's stimulus checks actually got spent? And tax cuts for businesses are not going to encourage businesses to hire or increase output when the demand does not exist. It is estimated that every dollar of government infrastructure spending creates $1.59 in GDP growth, while tax cuts generate $1.01. And considering the lack of consumer confidence, expect most of that to be saved.
I tend to support Cato on a lot of issues because of my own libertarian leanings, but we will not find a way out of this problem by telling the government to get out of the way. My question for my Metro State economists, John Cochran and Kishore Kulkarni: What percentage of tax cuts would actually improve economic performance?