Here’s an easy question, one that even the most brain dead, biased and unthinking economist can easily get the answer to. What happens when an economy significantly cuts government spending?
The Answer, you get
Greece. Don’t like that answer, ok, you get Spain. Still not happy, you get Britain. Need more countries, try Ireland, Italy
and Portugal. Yes, all of these countries undertook drastic
cuts in government spending and all of these countries are experiencing low or
negative growth and rising unemployment.
All experienced the result everyone would expect.
The reason this is relevant is that former Bush administration economic advisor Edward Lazear writes in the Wall Street Journal and makes this astounding stupid statement.
Edward Lazear: Three Views of the 'Fiscal Cliff'
It's the tax increases we have to fear. Spending cuts won't hurt the economy.
Really, he does.
Here is his phony, lousy, stupid, incorrect basis for this astounding statement. First of all he makes a statement about “until recently”.
Until recently, most economists believed that fiscal policy was inappropriate for business-cycle management, and that if stimulus was needed at all, monetary policy was the best way.
which is true, if one interprets ‘until recently’ to mean 1935. He then goes on to say this.
But even if a fiscal stimulus has some benefit, the cost of fiscal policy is likely to be very large. In order to stimulate the economy, growth in—not high levels of—government spending is required. To provide a stimulus in 2013 comparable to the 2009 legislated stimulus, we would need to increase government spending by about $250 billion.
But the Keynesian view implies that keeping spending constant at the higher level in 2014 would generate no stimulative growth effect for 2014. Despite the higher level of spending in 2014, we would get no additional growth because there is no increase in spending over the 2013 level. Were we to retreat to current levels of spending, there would be a contractionary effect on the economy as government spending decreases. If we want to delay our day of reckoning, we must keep spending at a higher level for each year that we want to postpone the negative consequences for growth. Given the state of the labor market, this could mean a few years. If we waited four years, we would spend $1 trillion to get $250 billion in stimulus.
This is the logic of an economist who has never ever studied economics. The stimulative impact of government spending serves to drive economic growth. When that happens the private sector responds by increasing investment and employment. That private spending gradually takes over for the federal spending, allowing the government to reduce its stimulus spending, with the ensuing increases in tax revenues ultimately reducing the deficit.
Don’t believe it, check the textbooks, it’s in all of them. Want empirical proof, see economic resulst, 1993-2000. Want more empirical results about the failure of tax cuts as effective policy, see Bush, George W.
Want to read the Village Idiot’s Guide to Economics, see Lazear, Edward. He is the author and he speaks from personal experience.