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May 31, 2010 12:07PM

Krugman vs. Cato on Cutting Back Spending

Paul Krugman writes today, “Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea.” I can’t speak for the particular textbooks Krugman reads, but Cato Policy Report just looked at the most significant example of slashing spending in American history — the quick, sharp spending cuts after World War II. Economists Jason Taylor and Richard Vedder find:

the “Depression of 1946” may be one of the most widely predicted events that never happened in American history. As the war was winding down, leading Keynesian economists of the day argued, as Alvin Hansen did, that “the government cannot just disband the Army, close down munitions factories, stop building ships, and remove all economic controls.” After all, the belief was that the only thing that finally ended the Great Depression of the 1930s was the dramatic increase in government involvement in the economy. In fact, Hansen’s advice went unheeded. Government canceled war contracts, and its spending fell from $84 billion in 1945 to under $30 billion in 1946. By 1947, the government was paying back its massive wartime debts by running a budget surplus of close to 6 percent of GDP. The military released around 10 million Americans back into civilian life. Most economic controls were lifted, and all were gone less than a year after V‑J Day. In short, the economy underwent what the historian Jack Stokes Ballard refers to as the “shock of peace.” From the economy’s perspective, it was the “shock of de‐​stimulus.”


If the wartime government stimulus had ended the Great Depression, its winding down would certainly lead to its return. At least that was the consensus of almost every economic forecaster, government and private.…


What happened? Labor markets adjusted quickly and efficiently once they were finally unfettered — neither the Hoover nor the Roosevelt administration gave labor markets a chance to adjust to economic shocks during the 1930s when dramatic labor market interventions (e.g., the National Industrial Recovery Act, the National Labor Relations Act, the Fair Labor Standards Act, among others) were pursued. Most economists today acknowledge that these interventionist polices extended the length and depth of the Great Depression. After the Second World War, unemployment rates, artificially low because of wartime conscription, rose a bit, but remained under 4.5 percent in the first three postwar years — below the long‐​run average rate of unemployment during the 20th century. Some workers voluntarily withdrew from the labor force, choosing to go to school or return to prewar duties as housewives.


But, more importantly to the purpose here, many who lost government‐​supported jobs in the military or in munitions plants found employment as civilian industries expanded production — in fact civilian employment grew, on net, by over 4 million between 1945 and 1947 when so many pundits were predicting economic Armageddon.


Household consumption, business investment, and net exports all boomed as government spending receded. The postwar era provides a classic illustration of how government spending “crowds out” private sector spending and how the economy can thrive when the government’s shadow is dramatically reduced.

Krugman says that experience teaches us that controlling spending would “deepen the slump” and cause tax revenues to fall. But the experience of 1945–47 is that a spending cut far deeper than we could dream of today — from $84 billion to $30 billion! — led to an economic boom.

May 31, 2010 9:05AM

Yes, Rep. Luis Gutierrez Is Pro‐​National ID

In April, I inquired aloud whether Rep. Luis Gutierrez (D‑IL) supported a national ID. It’s clear now that he does—and he’s told us how he wants to use it.


On “Meet the Press” Sunday morning, he said:

I’ve got a driver’s license. It has my photo on it. I have a passport. When I go in and out of the country, the government swipes that passport, and it says, “OK, Luis, you’re ready to come in. You’re authorized.” Why can’t we have a Social Security card with a picture on it, so when you go get a job you swipe it? And if employers don’t use that card, issued by the government to authorize you before you go to work, we send those employers to jail.

Create an internal passport. Send employers to jail. Stop willing Americans from working. Get a handle on all this unfettered freedom.


I discussed why we shouldn’t have a national ID card and federal worker background check system in my Cato Policy Analysis, “Franz Kafka’s Solution to Illegal Immigration.” Congressman Gutierrez’ desire for overall reform is welcome. Some reasons why not to adopt the current national ID card proposal are here, here, here, and here.

May 30, 2010 11:52PM

Meditations on Memorial Day

Benjamin Franklin said, “There never was a good war or a bad peace.” Given Franklin’s leadership in the struggle for American independence, we can infer that he did not think that there never was a war that was necessary, or a war that was worth its cost. But he reminds us that even necessary wars have terrible costs.


I thought about Franklin when I read Mark Helprin’s eloquent column on Memorial Day, which included these lines:

Though if by and large we ignore the debt we owe to those who fell at Saratoga, Antietam, the Marne, the Pointe du Hoc, and a thousand other places and more, our lives and everything we value are the ledger in which it is indelibly recorded.

It’s a timely sentiment, and we do indeed owe our lives and our pursuit of happiness to the freedom that America’s soldiers have sometimes had to defend. But I wonder: Does Helprin think that all of America’s wars have been necessary to American freedom? True, he doesn’t allude to any of our wars since World War II in his list of hallowed places. But he does mention the Second Battle of the Marne, the great turning point of World War I and the first battle in which Americans started experiencing the enormous casualties that Europeans had been facing for nearly four years. The problem is that World War I was a catastrophe, a foolish and unnecessary war, a war of European potentates that both England and the United States could have stayed out of but that became indeed a World War, the Great War. In our own country the war gave us economic planning, conscription, nationalization of the railroads, a sedition act, confiscatory income tax rates, and prohibition. Internationally World War I and its conclusion led directly to the Bolshevik revolution, the rise of National Socialism, World War II, and the Cold War. World War I was the worst mistake of the 20th century, the mistake that set in motion all the tragedies of the century. The deaths of those who fell at the Marne are all the more tragic when we reflect that they did not in fact serve to protect our lives and all that we value.


On this weekend we should mourn those who went to war, such as my father, who planned and participated in the liberation of Europe, and his brother who was lost off the coast of Normandy, and we should resolve not to risk American lives in the future except when our vital national interests are at stake.

May 30, 2010 1:48PM

Obama’s Spending RUSe

George Will goes after President Obama’s proposed Reduce Unnecessary Spending Act. Will focuses primarily on the dubious constitutionality of allowing the president to delete items from a spending bill after he’s signed it, a form of line‐​item veto.


But he also notes that it wouldn’t do much to actually reduce federal spending, which is growing uncontrollably. For one thing, it provides that if the president removes items from an appropriations bill, and Congress accepts his list, the total appropriation would not be reduced. And of course the president is not going to use a line‐​item veto on entitlements or debt service, or much of the defense and homeland security budgets, which leaves only 17 percent of the budget under scrutiny. He notes:

What about earmarks? If all 9,499 of last year’s had been vetoed, this would have saved $15.9 billion, or a risible 0.45 percent of spending.

And he concludes:

Last year, Obama ordered 15 department heads to find economies totaling $100 million, which was then 13 minutes (0.0029 percent) of federal spending. His new rescission proposal also is frugality theater and is similarly frivolous.

But Will doesn’t take the cheap shot of dubbing the bill the RUSe Act. He left that for us. A ruse is “a wily subterfuge” or “a deceptive maneuver” — a perfect description for this misleading bill offered in response to growing public concern over federal spending.

May 28, 2010 9:26PM

Is Hillary Clinton Ignorant about Geography, Fiscal Policy, or Both?

Hillary Clinton recently opined that Brazil was a great role model for the idea of soaking the rich with higher tax rates. She didn't really offer evidence for that specific assertion, but Politico reports that she did say that "Brazil has the highest tax-to-GDP rate in the Western Hemisphere and guess what — they're growing like crazy."

I'm not sure if "growing like crazy" is an accurate description, particularly since poor nations normally have decent growth rates because they start from such a low baseline.

But let's excuse that bit of rhetorical excess and focus on the really flawed portion of her remarks.

Contrary to her direct quote, Brazil does not have the "highest tax-to-GDP rate in the Western Hemisphere." It may have the highest tax burden in South America. And it may even have the highest tax burden in all of Latin America, but its overall tax burden of about 24 percent of GDP is slightly below the aggregate tax burden in the United States.

I suppose I should issue a caveat and say there's a very slight chance that the recession has temporarily pushed U.S. tax receipts as a share of GDP below the Brazilian level, but that isn't apparent from the IMF data. Moreover, there's no doubt that the tax burden in Canada is significantly higher than the Brazilian burden.

So Secretary Clinton either was unaware that the United States and Canada are in the Western Hemisphere, or has no clue how to read fiscal statistics.

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May 28, 2010 3:58PM

Weak Defenses of Teacher Bailout

As the Obama administration continues to send mixed signals about the proposed $23 billion public-school bailout, rescue advocates are offering some very wimpy defenses of their cause. That is, except for the National Education Association, which has launched a PR blitz for the bailout in its grandest -- and most shameless -- tradition of using cute kids to get lots of dues-paying members:

OK, enough of the NEA. The more numerous defenses of the bailout try to offer more reasoned and less emotional arguments for the bailout than does the NEA. But not much more reasoned.

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May 28, 2010 3:41PM

‘Do Something, Superpresident!’

Amid the din of James Carville's screeching, you may have missed a couple of reasonable voices taking issue with the "do something, Superpresident!" approach that's dominating the discussion of the Gulf Spill. (They both mention Cato work, which is a bonus).

In the Daily Beast, Tunku Varadarajan writes that this isn't

“Obama’s oil spill,” if by saying so we mean to ascribe culpability to the president. He didn’t run the rigs, or oversee the plans, or grant the licenses to drill, or write the rules that govern the granting of those licenses. He was just president when the bloody thing happened.

(Varadarajan links to this piece by Peter Van Doren and Jerry Taylor on what the spill says about "the profound intellectual poverty animating our public conversation about energy policy.")

Over on the New York Times' website, Glenn Greenwald cites my book, The Cult of the Presidency, to worry about a political culture dominated by

the mythology that presidents are paternal, virtually omnipotent figures who will protect us from harm and, in the broadest sense, ensure that justice is done.  Americans, in turn, crave protection from a messianic commander-in-chief, and are willing to vest him with great latitude and power in exchange for that protection.

This mystical conception of the presidency--and the power-concentrating dynamic it leads to--is the major theme of my book, especially Chapter 7, "Omnipotence and Impotence":

In the BBC production of Robert Graves’ “I Claudius,” Emperor Augustus tells his wife Livia that the Senate had voted to make him a god in the Syrian city of Palmyra, and the people there had put a statue of him in the temple, to which they’d bring offerings in the hopes that the emperor would grant rain or cure their ailments. “Tell me Livia,” Augustus says, “If I’m a god, even in Palmyra, how do I cure gout?”

Augustus’s frustration is all-too-familiar to the modern president. He can no more “manage” the economy or provide seamless protection from all manner of hazards than Augustus could bring rain or cure gout.

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