Encouraging Growth and Recovery or Reducing Goverment Deficits and Debt

Encouraging Growth and Recovery or Reducing Goverment Deficits and Debt: Not a Trade Off

Last week in “Thoughts on Capital-Based Macroeconomics”, Part III  (drafted in early November) I made an argument that a Rothbardian anti-recession policy of slashing government spending while cutting taxes, “particularly taxes that interfere with saving and investment”, would be a win-win policy for addressing simultaneously the size of government/government debt/deficit problem and the on-going slow recovery.

This recommendation is bolstered by interpretations of new empirical work on multipliers and the relative fiscal impact of tax changes relative to spending changes.

Other economists (see below) have recently come to make similar policy recommendations again based on a wealth of empirical work which supports this anti-Keynesian argument.

On Wednesday the Denver Post ran a reasonable column by Vincent Carroll, Ducking reality on the deficit on this continuing fiscal fiasco. I sent Mr. Carroll the following letter making this point.

Vincent:

Great column today (01-09-2013). I would add if we are to redistribute like Europe and if we must tax and spend like Europe and the result will be permanent relative stagnation like Europe. Compared to a relative less hampered economy with a smaller more efficient government there will be less innovation and prosperity.

Recently many economists have been arguing, based on relevant empirical research examining the impact of fiscal changes on the economy, i.e., government spending and tax changes, that there is a win-win policy for both the debt-deficit crisis and the slow recovery; tax reform that lowers marginal tax burdens accompanied by spending reductions.

See:

Robert Murphy, FEATURED ARTICLE | JANUARY 7, 2013

What Economic Research Says About Fiscal Austerity and Higher Tax Rates

at http://www.econlib.org/library/Columns/y2013/Murphytaxrates.html.

Jeffrey Miron, “Should U.S. Fiscal Policy Address Slow Growth or the Debt? A Nondilemma” at

http://www.cato.org/publications/policy-analysis/should-us-fiscal-policy-address-slow-growth-or-debt-nondilemma

And

John P. Cochran, “Thoughts on Capital-Based Macroeconomics”, Part III  at http://mises.org/daily/6307/Thoughts-on-CapitalBased-Macroeconomics

Of course, like you conclude, this sort of honesty is unlikely to appeal in Washington where those on both sides of the isle are always seeking the easy way out with deals, not good policy.

For a good discussion on the how and why to use empirical research in Austrian analysis see Robert Higgs, “Austrian Economics and the New Economic History” in Austrian Economics Newsletter vol. 15, no.1, at [Full Edition of Vol. 15, No. 1].

Comments

  1. The idea that government spending “makes up for” an economy-wide “liquidity preference” is silly. As has been pointed out on this blog many times, the government can spend only what it takes – taxes, inflates (a tax on currency) or borrows – from the private sector. The relationship between the public and private sectors is parasitical. Moreover, the idea of “special circumstances” in which “everyone” has a “liquidity preference” has not manifested itself. Most people in the US have less than $100K saved for their retirement, largely because we were fooled by an accommodating Fed into believing in the magic home equity fairy, and spent our present and some of our future earnings – you cannot seriously, then, believe that the problem is either a “liquidity preference” or “not enough spending / insufficient aggregate demand.” A handful of mature firms are liquid – nobody else is – and they do what they’re supposed to do: deposit that liquidity in banks, which typically lend it out to emerging firms, which then buy equipment from capital goods firms, which then borrow and raise capital. It is because we blew through our savings in the 2000s spending orgy that there is almost capital, and no capacity to buy. And what capital there is has been used to buy sovereign debt – an extra $1TN / year in US federal government debt alone. The problem isn’t “not enough spending” but “not enough capital” – i.e., not enough savings – and the diversion of what capital there is into financing the expansion of government – - this expansion, then, is not “stimulus” but its opposite.

    • “the government can spend only what it takes – taxes, inflates (a tax on currency) or borrows – from the private sector”

      Where does the private sector get the USD it pays in taxes or lends to the government?
      Isn’t the federal government the sole source of USD?

      That being the case, the federal government must spend dollars into existence before it can collect them as taxes or exchange them for interest bearing debt.
      The Federal government therefore, spends without the need for taxes or borrowing.

      “The problem isn’t “not enough spending” but “not enough capital” – i.e., not enough savings”

      If we’re talking about savings in USD, without government spending, how can the private sector net save (again, in USD)?

      The Public Sector’s deficit is equal to the Private Sector’s surplus (savings in USD).
      This is true by accounting definition.

      If you want more private sector USD savings then this requires by definition, a public sector deficit.

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