Friday, March 22, 2013

To Support the Republican Budget Economists John Cogan and John Taylor Pervert Economics – And Are Not Even Clever About It

Apparently Supporting Republican Budget Proposal Can Only Be Done With False Arguments

[Editor’s note:  This lesson in basic economics is brought to Conservatives by the letters ‘s’ and ‘t’, and the number zero.]

Economics is a social science, with emphasis on the science part.  Like every other academic discipline, it must conform to the rules of logic, the observations of data and the tenets of analysis.  This does not mean everyone on the profession must reach agreement, but it does mean that any position must be supported by the internal logic that is required for any rational thought process.

In order to support the economic policy prescriptions of Conservatives apparently one must abandon these requirements.  As an example, here is an opinion piece by economists John Cogan and John Taylor in the Wall Street Journal, one which goes counter to basic principles of economics.

Our assessment is based on a modern macroeconomic model (developed with Volker Wieland of the University of Frankfurt and Maik Wolters of the University of Kiel) whose features include a recognition that the resources to finance government expenditures aren't free—they withdraw resources from the private economy. 

Wow, a ‘modern’ macroecnomic model, what a great contribution as opposed to the old fashioned macroeconomic models.  But notice the utter fallacy of the basis of the analysis, that when the government uses resources they withdraw those resources from the private economy.

Now this is a true statement, BUT ONLY WHEN THE ECONOMY IS At FULL EMPLOYMENT AND FULL UTLIZATION.  When there are idle resources, such as the situation for the past five years the government can command those resources without reducing any activity in the private sector.  This is something taught on Day 1 in beginning economics.  Furthermore even if the economy is a full utilization, if government takes consumption spending away from the private sector and engages in investment than the economy will grow faster than it otherwise would do so.  Investment, regardless of whether or not it is private or public is the key to economic growth.

But here is another idiotic statement from these two economists.

The long-run economic gains from restraining government spending would not, despite what critics claim, harm the economy in the short run. Instead, the economy would start to grow right away. 

No, no, no.  A reduction in spending, regardless of its other merits will reduce growth.  It will lower employment and decrease economic activity.  Just ask the Conservatives in Virginia who are lamenting the reduction in government spending in that state.  This again is an uncontested issue.

Finally there is this from the opinion piece.

Nor does the model account for beneficial changes in monetary policy that could accompany enactment of the budget plan. Lower deficits and national debt would reduce pressure on the Federal Reserve to continue buying long-term Treasury bonds.

Translation – monetary policy will move towards lower bond prices and higher interest rates.  Who exactly thinks that higher interest rates will stimulate an economy?  What C- student of economics would even propose of suggest such a thing?

The only conclusion that can be drawn here is that the Republican budget plan is so fraudulent in terms of its positive impact on the economy that only fraudulent reasoning can support it.  If real logic, data and analysis were in its favor, wouldn’t that be what its supporters would write about.

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