Government Isn’t the Problem…and Austerity Isn’t the Answer

I have a friend who witnessed about half of the Supreme Court arguments on the Affordable Care Act. When he walked out of the courtroom, he wasn’t surprised to find a sea of people protesting the law. What did surprise him was how many of the protest signs were anti-Europe. Apparently, the protestors were worried that universal health insurance was the path to “becoming European” and all the nefarious consequences that implies.

If asked for their opinion on government spending to stimulate the economy, I imagine they’d give roughly the same answer.

But the truth is that fiscal irresponsibility has little to do with Europe’s current crisis.

Just before the recession hit, the European governments with the highest public social spending (relative to the size of their economy) were France, Austria, Belgium, and Germany — none of the so-called “PIIGS” nations that are in trouble. In fact, many conservatives have anointed Germany as the role model that its neighbors should emulate.

Even if you measure all government spending in the middle of the crisis, there is no correlation between a country’s public spending and the interest rates on its sovereign debt (which is the key indicator of financial distress).

From 1999 to 2007, the European government with the highest budget deficit (again, relative to economic output) was Slovakia, hailed by conservatives for its flat tax. France’s budget deficit was about as big as Italy’s, and Germany’s was close behind. Spain and Ireland actually had budget surpluses.

Besides, if government spending were the problem, then the crisis should be over by now. The EU and the IMF have forced the PIIGS nations to slash public expenditures — and the recession has only gotten worse.

Compare that strategy with what happened in the United States, where we took the opposite approach and increased public expenditures.

In the fourth quarter of 2008, real GDP contracted at an annual rate of 8.9 percent in the U.S. In January 2009, nonfarm employment declined by over 800,000. That was the lowest point both statistics — growth in economic output and jobs — would reach.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act (ARRA), better known as the “stimulus” package.

In the first quarter of 2009, real GDP contracted by 6.7 percent. In February 2009, nonfarm employment losses were closer to 700,000. The recession was clearly not over, but the bleeding had slowed.

On March 6, 2009, the Dow Jones reached its cyclical low of 6,626.94. The next day, it began a strong recovery.

By the third quarter of 2009, when the stimulus money was starting to be spent, the economy was growing again. By March 2010, job growth was positive again. (Job growth always lags behind economic output.) By February 2011, two years after Congress passed the ARRA, the Dow Jones cleared 12,000.

Clearly, the ARRA was the turning point. Its passage was the beginning of the end of the Great Recession.

Coincidence? Perhaps.

But isn’t it odd that none of the critics’ predictions came true? They warned that interest rates would skyrocket with the government borrowing so much money. Instead, interest rates plummeted. They warned that inflation would soar. Instead, it’s been low and stable.

And that’s not all. Several economists have measured the effect of the stimulus since it was spent. Two Dartmouth researchers, for example, compared jobs growth in each state and county to the amount of stimulus funds spent in that state or county. They found that every dollar spent on the poor yielded two dollars in increased economic output, and every dollar spent on infrastructure yielded $1.85 in output.

Another study compared jobs growth in each state to the amount of federal Medicaid matching funds spent in that state. They found that each dollar spent yielded two dollars in output. A similar study found that the ARRA “created or saved about 2 million jobs in its first year and over 3 million by March 2011.”

So it’s no surprise then that Europe continues to flounder while America continues to grow. You can’t beat a recession by cutting government spending. Even Mitt Romney said so.

==========

This op-ed was published in today’s South Florida Sun-Sentinel.

Quote of the Day: Christina Romer

When I was in the White House, I used to bristle when people would say I was a Keynesian economist. They acted as if I believed that fiscal stimulus mattered because of some theoretical book written in 1936, or because of what I was taught in graduate school. I used to say that I am not a Keynesian economist, I am an empirical economist. I believe what I do because of the empirical evidence.

— Christina Romer (University of California, Berkeley)

A Failure to Communicate, Not a Failure to Stimulate

It’s a little difficult to reply to Prof. Mishra’s latest op-ed because it doesn’t really have a point. It goes all over the place. As far as I can tell, the only actual argument he makes against President Obama’s American Jobs Act is:

…the first stimulus bill in 2008, a $700 billion package geared toward government spending to stimulate the economy, and financed with borrowed money, has obviously failed to create new jobs.

He never offers any evidence to support this claim.

I’ve disproven this hypothesis before, but I’ll do so again — first by repeating what I said last time, then with even more evidence. If you’ve already read the first part, you might want to skip to the new stuff, though it can’t hurt to refresh your memory…   Continue reading “A Failure to Communicate, Not a Failure to Stimulate”

5 Ways to Sound Stupid When Discussing the Debt Ceiling

In the past week, I’ve had conversations with people who voiced the following myths. Read and learn, lest you embarrass yourself in the same way.

Myth #1: Federal debt has been increasing under all presidents since World War II.

Reality: Federal debt steadily declined from the mid-1940s to the early 1980s, then it increased dramatically (with a brief hiatus in the mid-to-late 1990s). Ronald Reagan reversed four and a half decades of safe, responsible fiscal policy, and every successor except Bill Clinton followed his lead. See for yourself:   Continue reading “5 Ways to Sound Stupid When Discussing the Debt Ceiling”