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Wednesday, January 27, 2010

Spending Freeze? I Thought Obama Won the Election

John Maynard KeynesInfluential economist John Maynard Keynes once said about economic stimulus, "The government should pay people to dig holes in the ground and then fill them up." This was a facetious comment, but one that's haunted Keynesian economics ever since. Conservatives use that quote, along with the left's long adherence to Keynesian economic principles, as proof of the folly of "tax and spend liberals." Give money to the government and they'll just waste it with pointless spending.

But what Keynes actually meant was that when the only entity providing jobs is the government -- i.e., a recession or depression -- then the government should find ways to provide more jobs. It doesn't make much difference what those jobs are, since the idea is to inject money into the economy. In a country like the United States, where infrastructure has always been a non-priority, you're not going to have any trouble finding holes to fill. We've got bridges falling down, trains failing to run, and levees giving out. No one will ever have to dig holes to to be filled, but in the hypothetical case that this is the only job available, then that's the job that should be provided.

See, economics -- in the broadest terms -- has boiled down to two competing theories; demand-side and supply-side. The problem with supply-side economics is that no one's ever actually gotten it to work. With demand-side Keynesianism, we got out of the Great Depression.

The flaw with supply-side -- AKA "trickle down economics," AKA "Reaganomics" -- is that it relies on an economic hypothesis that's not only been proven untrue over and over, but that it seems crazy on its face. Basically, the idea is to get money to the richest members of society, because they'll use that money to create jobs and stimulate the economy. This doesn't work for a lot of reasons, the most obvious being A) rich people don't become rich by spending money they don't have to and, B) when it comes to creating jobs, see A. No one's going to hire someone just because they can afford to. Supply-side puts the cart before the horse.

Demand-side economics recognizes that the economy is driven by consumers, not employers. Where supply-side programs put money at the top, where it doesn't actually trickle down, up, or sideways, demand-side gets money to people at the bottom of the ladder. Here's where the obvious kicks in; people who need money are guaranteed to spend it. And, when they spend that money, it works its way throughout the entire economy -- from the bottom to the top. So the question is, do you try to get money to people who are basically money collectors or do you get money to people who have to spend it? Doesn't seem like much of a stumper to me.

All of which makes this a little hard to figure:

New York Times:

President Obama will call for a three-year freeze in spending on many domestic programs, and for increases no greater than inflation after that, an initiative intended to signal his seriousness about cutting the budget deficit, administration officials said Monday.

The officials said the proposal would be a major component both of Mr. Obama’s State of the Union address on Wednesday and of the budget he will send to Congress on Monday for the fiscal year that begins in October.

This actually represents two bad ideas; you don't cut spending during a recession, since the government is the only entity in the economy that's getting money out there, and you don't volunteer to put on a straitjacket.

"A spending freeze? That’s the brilliant response of the Obama team to their first serious political setback?" writes economic Nobel laureate Paul Krugman. "It’s appalling on every level."

It’s bad economics, depressing demand when the economy is still suffering from mass unemployment. Jonathan Zasloff writes that Obama seems to have decided to fire Tim Geithner and replace him with “the rotting corpse of Andrew Mellon” (Mellon was Herbert Hoover’s Treasury Secretary, who according to Hoover told him to “liquidate the workers, liquidate the farmers, purge the rottenness”.)

It’s bad long-run fiscal policy, shifting attention away from the essential need to reform health care and focusing on small change instead.

Further, says Krugman, "it’s a betrayal of everything Obama’s supporters thought they were working for," because "Obama has embraced and validated the Republican world-view -- and more specifically, he has embraced the policy ideas of the man he defeated in 2008."

This isn't entirely true. Obama's spending freeze is different from McCain's. But this is just the difference between stupid and really stupid.

"[T]his is a perfect example of fundamental unseriousness," writes UC Berkley economict Brad DeLong, "rather than make proposals that will actually tackle the long-term deficit -- either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits -- come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way."

Want good news here? There's a good chance this isn't going to happen. Liberals in congress were predictably appalled by the idea and the leadership of both chambers "withheld their backing for the proposed freeze, saying they needed to see details," according to The Hill.

Part of me, in my secret heart of hearts, hopes the president is counting on this going nowhere. He's seen what this congress can (or rather can't) do. He makes a boneheaded proposal, it gets lost in that hopelessly useless swamp of idiocy and incompetency that is the Democratic caucus, and he pretends to settle for a watered-down version.

But the rest of me thinks that's probably BS.


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1 comment:

Anonymous said...

100% correct!