Friday, February 13, 2009

Outsourcing economic criticism

We’re in difficult economic times. In the private sector, mass layoffs are being announced every day. In California, even public employees are being forced to do the same work with less hours and less money.

Therefore, in these difficult times I’ve decided until further notice to apply the principles of open innovation — specifically, to outsource commentary on economic policy to other sources that provide their content for free.

First up this week is economist Kevin Hassett

Until this year, the biggest countercyclical government-spending program in history was in the 1981–82 recession, when government spending increased by a bit more than 2 percent of GDP. In this recession, the increase will be approximately three times that [to about 6.3%].

The truth is that there is very little empirical support for policies such as these. They will likely provide a small boost, at an enormous cost. When the boost is gone, the cost will remain.
Next is retired finance professor Michael S. Rozeff
[The politicians] offer nothing to encourage saving. In fact, they burden the saver and the productive. Since saving is the source of investment, they offer no fuel for entrepreneurial activity. Since entrepreneurs are the source of employment, they offer no support for jobs that can raise real incomes. Their policies attempt to and may succeed in locking in the ill-made investments of the past while adding new ones.
Last — but certainly not least — are two Chicago economists, Nobel Prize winner Gary Becker and MacArthur Fellow Kevin Murphy:
A very large amount of money will be spent quickly over a two-year period: $500 billion amounts to about one-quarter of the total federal government annual spending of $2 trillion. It is extremely difficult for any group, private as well as public, to spend such a large sum wisely in a short period of time.

In addition, although politics play an important part in determining all government spending, political considerations are especially important in a spending package adopted quickly while the economy is reeling, and just after a popular president took office. Many Democrats saw the stimulus bill as a golden opportunity to enact spending items they've long desired. For this reason, various components of the package are unlikely to pass any reasonably stringent cost-benefit test.

The increased federal debt caused by this stimulus package has to be paid for eventually by higher taxes on households and businesses. Higher income and business taxes generally discourage effort and investments, and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt. The burden from higher taxes down the road has to be deducted both from any short-term stimulus provided by the spending program, and from its long-run effects on the economy.

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