The topic of the week here was economics, where Zach asked if we need another stimulus or if spending cuts are enough. Economist Dean Baker recently weighed in on this topic with a not so kind to President Obama essay, where he points out that exactly what we need is another stimulus!
President Obama is no longer paying attention to economists and economics in designing economic policy. Instead, he will do what his campaign people tell him will get him re-elected, presumably by getting lots of money from Wall Street.
The article said that President Obama intends to focus on reducing government spending and cutting programs like social security and Medicare. This is in spite of the fact that: “A wide range of economists say the administration should call for a new round of stimulus spending, as prescribed by mainstream economic theory, to create jobs and promote growth.”
The “tea party” and current republican leadership would have you believe that spending cuts is the final answer. The problem with that is it just does not make sense.
There, of course, is a theory as to how budget cuts could boost growth. The theory is that lower deficits in the present and/or near future will reduce fears that government spending will be crowding out private economic activity. This would lead to lower interest rates. Lower interest rates will provide a boost to investment and consumption. Also, lower interest rates in the United States will make dollar assets less attractive to investors. This will cause the dollar to decline against other currencies, improving our trade balance.
However, no part of this story makes sense in the current economic environment. US interest rates are already at ridiculously low levels, with the 10-year Treasury rate falling below 2.2% in the wake of the recent euro crisis. Does anyone really believe that the rate will go much lower even with large cuts to the budget?
Furthermore, even if interest rates did fall, it is difficult to believe that it would have much impact on either investment or consumption. Investment is not very responsive to interest rates even in the best of times. It is extremely unlikely that firms will rush to buy new equipment even if interest rates were to take another large plunge, when most are still operating with vast amounts of excess capacity. Consumers remain heavily indebted due to the collapse of house prices. Furthermore, the huge baby boom cohort is going to feel more need to save than ever with the government slashing its social security and Medicare benefits.
The trade side of the picture doesn’t look much better. The dollar continues to be a safe haven in uncertain times. Furthermore, China and other export dependent countries care little about US interest rates; they want to protect their markets in the United States. They are likely to keep the dollar from falling too much against their currencies no matter how low interest rates fall.
Of course when was the last time people like Paul Ryan and John Boehner even made real sense? I can’t remember either!
Just as we have many politicians who ignore climatologists in the design of energy policy, and politicians who think that biology has no place in teaching the origins of species, we now have politicians who think that economics has no place in designing economic policy.
This could be viewed as comical, but tens of millions of lives stand to be ruined. Ever since Keynes, we have known how to bring an economy back to full employment after it has fallen into a slump. Keynes’s basic insights have been supported by a vast amount of economic research over the last seven decades. And we have solid evidence showing that the limited stimulus pushed through by Obama in 2009 worked pretty much as predicted in generating growth and jobs.
But evidence, apparently, doesn’t matter at the White House any more.
Did the stimulus work? Of course it did!
By the way Wisconsin’s very own lightweight Senator Johnson has his own idea on how to stimulate the economy, and continues to embarrass himself and our great state!