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337 Economists Disagree With Obama’s Stimulated Spending Spree March 9, 2009

Posted by Daniel Downs in deficit spending, economy, Federal Reserve, government, monetary policy, news, politics.
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President Obama says that “economists from across the political spectrum agree” on the need for massive government spending to stimulate the economy. In fact, many economists disagree. Hundreds of them, including Nobel laureates and other prominent scholars, have signed a statement that the Cato Institute has placed in major newspapers across the United States.

Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we 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, policy makers 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.

(To see the list of the 337 economists who agree with the above statement, visit Cato.)

In St. Louis Dispatch article, economists Lawrence H. White and David C. Rose wrote that the government spending will not resolve the economic crisis because our crashing economy was the result of overspending. The following is one part of their explanation:

In 2001, the Federal Reserve began expanding the money supply. Year-over-year growth rose briefly above 10 percent and remained above 8 percent into the second half of 2003. The effect on interest rates was immediate; the Fed funds rate that began 2001 at 6.25 percent ended that same year at 1.75 percent. It fell further in 2002 and 2003, reaching a record low of 1 percent in mid-2003. But if the Fed hadn’t increased the money supply from 2002 to 2006, increased demand for credit resulting from deficit spending and the increased demand for real estate would have pushed up interest rates. This would have discouraged borrowing. Rising interest rates would have thwarted the process by which an increase in borrowing by the government and by the public artificially inflates asset prices, begetting even more borrowing.

Notice, the causes were increased money supply printed by the Federal Reserve, the decrease of interest rates, more government deficit spending. This is not by accident or free market processes; it is deliberate policy decision by Congress and the Federal Reserve.

At least part of the increase in deficit spending was the result of higher costs of goods which cause by the Federal Reserve printing and circulating more paper money to increase more spending by the government and not just consumers.

In a recent Tax & Budget Bulletin, Daniel J. Mitchell wrote:

“Government spending generally is a burden on the economy. Whether financed by debt or taxes, government spending requires a transfer of money from the productive sector of the economy. Moreover, most forms of government spending result in the misallocation of labor and capital, causing even further damage.”

“Once government expands beyond the level of providing core public goods such as the rule of law, there tends to be an inverse relationship between the size of government and economic growth. This is why reducing the size and scope of government is one of the best ways to improve economic performance. Unfortunately, policy moved in the wrong direction during the Bush years, and proposals for so-called stimulus indicate a continuation of those failed policies during the Obama years.”

“The economy’s ability to produce real goods and services is determined by the amount of plant and equipment, the number of workers, the supply of raw materials, and so on,” according to White and Rose. Therein lies the solution. It is not in government bailouts of failed and illegal corporations; not in welfare programs for corporations or the general population; and not in more investment in government infrastructure.

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Comments»

1. rdewar839797 - March 25, 2009

Why should we pay companies who fail? What happened to may the best man win? Why don’t we reward companies that succeed instead of companies that fail? All the failed companies had very bad management, activities bordering on the criminal, and their top people acted more like crime syndicate bosses than top executives. I am most familiar with the auto industry. My book “A Savage Factory” is my memoir of working as a supervisor in an auto plant when they were like warring gangs and the ones that suffered the most were the customers. That is why Toyota, Honda, and the other “transplants” are here, because car buyers wanted more reliability and quality. Enough is enough. If it keeps up the peasants may head to the castle with pitchforks and torches.


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