Friday, November 5, 2010

Harvard Academics Agree: Budget Balancing Is Best Done By Reducing Government Spending

The reason that many big government types love the economist John Meynard Keynes is that out of all of Keynes' ideas, they are able to single out his recommendation of government spending to stimulate the economy as support for what they want to do politically.  The major argument against deficit spending (other than the fact that your kids eventually have to pay for the money you borrow) was that government spending 'crowds out' private investment.  When the government prints money to spend on programs, the money supply is increased.  When the supply of anything is increased, it's price goes down.  So when the supply of money is increased, interest rates go down, and the private sector doesn't invest their money (in business improvements) because the return on investment isn't as good.

With the Federal Reserve announcing QE2, which is exactly what I just talked about in the last paragraph, The Economist picked a good time to talk about the issue.  In Britain, they announced some "austerity measures", which is the proper British way to announce that a bunch of government jobs were being cut.

In America, reducing government is of course prohibited by the 88th amendment to the Constitution, so we tried to raise taxes.  The money wasn't even used to balance the budget; it was used to pay for new tomfoolery and ballyhoo.

Now, normally this move could be supported by a cadre of Harvard economists.  However, in this case, research by professors from Harvard and elsewhere conclude that the 'crowding out' theory holds water:
It found that a 1% rise in government consumption as a share of GDP eventually reduced private-sector consumption by 1.9%. Temporary spending to pick up economic slack may be useful but the long-term benefits of austerity seem clear.


Deke said...

What is the 88th amendment to the US Constitution? I wasn't aware it existed.

Brian Gill said...

It's just a little sarcasm to make the post more interesting.

Deke said...

Oh! Haha. I love good sarcasm!