"The logic of the argument is that
insufficient consumer spending caused the Great Recession, the anemic
recovery, and persistent high unemployment. If people aren’t spending, so
goes the argument, businesses lay off workers. And when the newly
unemployed workers reduce their spending, more workers are laid off. This
ripple effect puts the economy into recession. To end the recession,
consumer demand must grow again, but it can’t grow because unemployment
is high. It’s a vicious circle: people don’t spend enough because they
don’t have jobs, but they can’t find jobs because people aren’t spending
enough.
"Therefore, says Krugman, government must spend. This is why he
supports more debt. And this is why he thinks cutting spending to rein in
the deficit is precisely the wrong thing to do now. Keep the deficit
spending going to create jobs, Krugman says, and worry about the debt
later. There’ll be plenty of time for that.
"If this were really how things worked, we’d be in a fix. But they
don’t work that way. Business cycles -- the boom and bust -- don’t happen
because consumers all mysteriously decide to cut their spending, throwing
people out of work. And since that’s not the cause of the downturn,
increased government spending is not the cure."
Cutting Government Would Boost
Economy
by
Sheldon Richman
March 7, 2013
Budget sequestration is as modest a step toward cutting Leviathan as one
can imagine. Further progress will be difficult as long as people believe
that slashing the size of government conflicts with reviving the economy.
Nothing could be further from the truth.
In his recent debate on Charlie Rose, Nobel Prize-winning
economist and New York Times columnist Paul Krugman said that even
wasteful government spending should not be cut, because it would
undermine job creation and economic recovery. This view isn’t quite as
popular as it once was, but it is still influential.
The logic of the argument is that insufficient consumer spending caused
the Great Recession, the anemic recovery, and persistent high
unemployment. If people aren’t spending, so goes the argument, businesses
lay off workers. And when the newly unemployed workers reduce their
spending, more workers are laid off. This ripple effect puts the economy
into recession. To end the recession, consumer demand must grow again,
but it can’t grow because unemployment is high. It’s a vicious circle:
people don’t spend enough because they don’t have jobs, but they can’t
find jobs because people aren’t spending enough.
Therefore, says Krugman, government must spend. This is why he supports
more debt. And this is why he thinks cutting spending to rein in the
deficit is precisely the wrong thing to do now. Keep the deficit spending
going to create jobs, Krugman says, and worry about the debt later.
There’ll be plenty of time for that.
If this were really how things worked, we’d be in a fix. But they don’t
work that way. Business cycles -- the boom and bust -- don’t happen
because consumers all mysteriously decide to cut their spending, throwing
people out of work. And since that’s not the cause of the downturn,
increased government spending is not the cure.
In other words, the spending frenzy, the deficit, and the debt all can be
addressed while the economy is recovering. In fact, radically
downsizing government is the key to recovery.
Recessions begin because a string of large-scale business investments
prove to be unsustainable in light of real economic conditions. Why would
so many entrepreneurs make the same mistake at the same time? Because the
government and its central bank -- the Federal Reserve -- create
misleading signals in the form of artificially low interest rates and
(before the most recent recession) artificially high demand for housing.
These policies fool entrepreneurs into thinking that consumers are saving
rather than spending, that is, deferring consumption until the future.
Businesses then use the easy credit for long-term interest-rate-sensitive
projects, such as housing and stages of production remote from the
consumer-goods level. Yet consumers have not curtailed
spending.
The recession sets in when interest rates rise and the cluster of errors
is revealed. The malinvestments are liquidated, and workers are laid off.
If the economy is to recover, the structure of production must be
realigned with real economic factors, including people’s
consumption/saving preferences. This is a costly and time-consuming
process because workers may need retraining, buildings may need
modifying, and machinery may need to be moved or junked. Government
policy misshaped the economy, which now must be reshaped into something
more appropriate.
Government’s only proper task is to get out of the way so that the
recovery can be as fast and painless as possible. In the past, when
government cut spending and taxes with the onset of a recession, recovery
was sure and swift. What the economy needs is resources -- savings -- to
recover. If the government consumes scarce resources, they are
unavailable for private efforts. And if the Fed keeps interest rates low,
it discourages saving.
Krugman and other Keynesians are wrong when they call for more deficit
spending, because that would transfer scarce capital from recovery
efforts to politicians, who can have no idea what they are doing. Since
government spending faces no market test, it is unlikely to be what is
needed. Only investment guided by the price and profit/loss system can
make things right. But that requires government to relinquish its claim
on private resources.
We can have a vibrant economy and much less government.
http://fff.org/explore-freedom/article/cutting-government-would-boost-economy/
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