Bigger Government And Spending Does Not Boost Growth

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The document argues that Keynesian economic theory, which advocates for increased government spending and deficit spending to boost economic growth, is flawed based on historical evidence. It cites examples from the 1930s under Hoover and Roosevelt, as well as more recent policies under Ford, Bush, and in Japan in the 1990s, that showed increased government spending and deficit spending did not successfully stimulate economic growth and reduce unemployment as Keynesian theory predicts. The document concludes that there is no evidence that bigger government boosts economic growth, and that long-term pro-growth policies are better than short-term stimulus policies.

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Keynes Was Wrong: Bigger Government Does Not Boost Growth Cato Hill Forum, December 18, 2008

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As late as 1992, the United States was running budget deficits of nearly $300 billion. During the remainder of the 1990\'s, deficits declined and became surpluses. As the new century began, these surpluses again turned into deficits. •Explain the decline in deficits and subsequent surpluses in the late 1990\'s. •Explain the return to deficit spending since the turn of the century. •Consider the causes of the deficits and surpluses and provide your own insight as to whether these surpluses or deficits have a \"positive\" or \"negative\" effect on our economy Solution As the 1990s came to an end, virtually all financial-market observers and politicians rejoiced that budget deficits were gone and that the U.S. had entered a period of fiscal stability. Politicians on both sides of the aisle viewed the new world of budget surpluses as an opportunity to save Social Security, to cut Federal debt, and to lower taxes. Budget deficits or budget surpluses are neither good nor bad, they are fiscal policy options that can stabilize or de-stabilize an economy. The U.S. economy, under Reagan, Bush, and early Clinton, experienced higher not lower rates of economic growth at a time when budget deficits were at record levels and tax rates were on the decline. Over the past 20 years a period of record budget deficits the stock market increased from 950 to over 11,000, providing ample evidence that budget deficits are not necessarily bad for an economy.On the other hand, budget surpluses are not necessarily good. As the budget surpluses began to expand dramatically in late 1999 and into 2000, the stock market appeared to be reversing the record up-trend of the 1980s and \'90s. One possible reason for the reversal: the growing budget surplus was sapping the savings of the private sector. Consumers were able to maintain their spending only through expanding debt to record level. In the late 90s, the confluence of strong economic growth, decelerating federal government spending, and substantial increases in tax rates (revenues) had the unexpected effect of producing enormous budget surpluses. As unexpected budget surpluses burst on the scene in the late 1990s, most mainstream economists weren’t sensitive to the contractionary impact that surpluses can have on the economy. The reason was simple that none of their economic models ever included the forecast of a substantial surplus. Ronald Reagan’s was the vice president of the USA for eight years and knew firsthand how difficult it was to bring the federal budget deficit down from 6 percent of GDP in 1983 to 2.8 percent in Reagan’s last budget. Bush knew that the many budget deals of the 1980s had been hard fought and always involved higher taxes as part of the deficit reduction, Reagan signed into law 11 major tax increases that raised taxes by $133 billion in 1988 or 2.7 percent of GDP.Bush administration economists believed that an easier monetary policy was the key to stimulating growth. But Federal Reserve Board.

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DB2 7 Economic Policy Challenging Incrementalism Incremental and Nonincremental Policymaking Traditionally, fiscal and monetary policies were made incrementally; that is, decision makers concentrated their attention on modest changes—increases or decreases—in existing taxing, spending, and deficit levels, as well as the money supply and interest rates. Incrementalism was especially pervasive in annual federal budget making. The president and Congress did not reconsider the value of all existing programs each year, or pay much attention to previously established expenditure levels. Rather last year’s expenditures were considered as a base of spending for each program, attractive consideration of the budget proposals focused on new items or increases over last year’s base. But crises often force policymakers to abandon incrementalism and reach out in non-incremental directions. In economic policy, the president and Congress and the Fed are pressured to “do something” in the face of a perceived economic crisis, even if there is little consensus on what should be done, or even whether there is anything the federal government can do to resolve the crisis. As we shall see later in this chapter, the recession that began in 2008 caused policymakers to search for new policies and make dramatic changes in spending and deficit levels and to undertake unprecedented measures to prevent the collapse of financial markets and avoid a deep recession. Fiscal and Monetary Policy Economic policy is exercised primarily through the federal government’s fiscal policies—decisions about taxing, spending, and deficit levels—and its monetary policies—decisions about the money supply and interest rates. Fiscal policy is made in the annual preparation of the federal budget by the president and the Office of Management and Budget, and subsequently considered by Congress in its annual appropriations bills and revisions of the tax laws. These decisions determine overall federal spending levels, as well as spending priorities among federal programs. Together with tax policy decisions (see Chapter 8), these spending decisions determine the size of the federal government’s annual deficits or surpluses. Monetary policy is the principal responsibility of the powerful and independent Federal Reserve Board—“the Fed”—which can expand or contract the money supply through its oversight of the nation’s banking system (see “The Fed at Work” later in this chapter). Congress established the Federal Reserve System and its governing Board in 1913 and Congress could, if it wished, reduce its power or even abolish the Fed altogether. But no serious effort has ever been undertaken to do so. Economic Theories As Policy Guides The goals of economic policy are widely shared: growth in economic output and standards of living, full and productive employment of the nation’s work force, and stable prices with low inflation. But a variety of economic theories compete for preeminence as ways of achiev.

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