In chapter two of the book, I include a table of propositions to which most economists subscribe, based on various polls of the profession. Here is the list, together with the percentage of economists who agree:
1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
2. Tariffs and import quotas usually reduce general economic welfare. (93%)
3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
6. The United States should eliminate agricultural subsidies. (85%)
7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
11. A large federal budget deficit has an adverse effect on the economy. (83%)
12. A minimum wage increases unemployment among young and unskilled workers. (79%)
13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)
If we could get the American public to endorse all these propositions, I am sure their leaders would quickly follow, and public policy would be much improved. That is why economics education is so important.
Note that the proposition about fiscal policy (#4) does not distinguish between taxes and spending as the best tool for purposes of macro stabilization. Maybe that question should be added in a future poll. I doubt, however, that the answer would make it onto this list of widely agreed upon propositions.
Mankiw's blog can be found here. Well worth bookmarking!
11 comments:
I absolutely agree with the points about free trade (no tariffs and import quotas), outsourcing (another aspect of free trade), and farm subsidies (they really are quite evil)), but am confused about number 11. What about Keynesian economic principles in a recession/depression (or does this only apply to a normal economy?).
As to the question of tax cuts vs. government expenditure increase, here is the Keynesian view to which I subscribe (at least for now!).
The effect of tax cuts: Money goes directly to the consumer, who in turn pays off debt or saves it (generally). The problem with this is that either way, that money is being deposited in a bank of some sort. This does not actually raise the amount of money "invested" in the economy, as the federal government would have to remove money from its own bank (the Fed), making that money unavailable to banks. So there is no actual net increase in savings, and definitely no net increase in spending.* *This is provided that no new money is printed.
Because most tax cut money is saved, it loses its velocity, which reduces total income. The more times a dollar exchanges hands, the more total income results and the more resources of an economy are utilized (and the stronger that economy becomes). Tax cut money (when saved or used to pay off debt) obviously has a very low velocity and works counter to utilizing more of an economy's resources.
This is why direct government expenditure is preferred. By paying for government works projects, etc., gov't funds are being used to provide "income," giving that money a higher velocity and consequently raising the total income of our economy. Interestingly enough, when people's incomes increase, they tend to spend more of them rather than save them (as opposed to tax cuts), so that money gains more velocity, as it becomes income for someone else.
Essentially the goal of stimulus should be to make sure its money gets spent as many times as possible before being saved.* Simply put, direct gov't spending is a more effective way to do this. *I know this contradicts Smith's Law of Accumulation, but we're dealing with the macroeconomics of a relatively short-term problem in which "growth" (for which the Law of Accumulation is a means to reach) is not so much a goal as is the prevention of depression.
Scott,
I believe it can be simultaneously true that large budget deficits are bad (because they crowd out private investment) and that deficit spending can act as counter-cyclical relief in a downtown. If you take either issue in isolation, the policy choice is easy. As we've seen with the stimulus package, however, all other things are not equal and the trade offs between trying to pump up the economy now vs. the longer term problems that stem from the national debt are not obvious. While it seems that more economists supported the stimulus, it will still cost us -- some of us more than others.
Ultimately, a lot of the recent policy argument, couched in economics as it is, boils down to one's comfort level with redistribution. Who is going to pay? Everyone, but not in equal amounts and not in equal % changes from a 2007-8 baseline. One can be an advocate for the working class and also believe that large pools of capital controlled by private investors are the best way to spur growth in the long run. However, in an economic crisis in which the balance between those interests is in flux and innocent people are suffering because of the greed of individuals at the top of the system, it is awfully hard to separate out these issues from political value choices and personal interests.
Keynesian economics is still wrong. The government has no real resources and can only redistribute the resources that we have. Spending isn't the source of economic growth, saving is (also, all saving is future consumption).
Not to mention the noted inefficiency of government (which happens because the politicians and bureaucrats aren't spending their own money and the government is a monopoly with no competition)
Therefore, government spending may create jobs, but these jobs are inefficiently utilizing resources and diverting resources (people, money, capital) from productive uses.
Since the government pays these workers with money that is taken from the private (efficient) sector, government spending lowers economic efficiency and economic growth.
Note that these claims are empirically supported by the example of the Great Depression. After the initial crash, Hoover and Roosevelt both were massively interventionist and the economy did not truly recover until 1946 (when intervention went way down). I also want to point out that war does not help the economy, since the productive capacities of people are diverted into unproductive things like killing people and blowing up buildings etc.
Saving money now does not create any additional income in the future than it would if we were to spend money now. Here's why:
Let's say John goes out to the movies every Saturday night. He buys some popcorn, a soda, candy, etc. The point is that he is consuming in the present. That money that he spends supports the income of everyone connected to providing him with those goods. Those people he supports as well as the firms associated with the products he consumes (movie theater, candy company, Oroville Redenbacher, the movie studios, the tour bus company that takes people around Beverly Hills, etc.) do two things with their money. They either spend it somewhere else (starting the cycle all over and adding velocity to that money) or they save it in the bank.
As that money keeps going through this consumption cycle (increasing in velocity), a little bit of it keeps getting chipped away to be "saved." If no one ever took loans out or withdrew from banks, theoretically all of this income would eventually become savings.
Let's say that John expects the economy to tank in a couple of months and his income to decrease. John decides he will no longer go to the movies; instead, he saves all of that money directly, cutting all of those people and firms out of the process.
Either way, the same amount of money gets saved "for future consumption." The only difference is that by not spending, the movie theater stars laying people off, popcorn goes stale (is that possible?), actors go homeless, no one wants to tour around foreclosed mansions, and everyone's worse off . . . even John, whose prophecy is self-fulfilled (he takes a pay cut; his house value plummets, etc.). But his initial self-interest gave him a nice rainy day fund to ride out the storm.
I don't disagree the the government is an inefficient utilizer of resources, but it is also the only player in this economy who is willing to forsake its self-interest (unlike John) and spend lots and lots of money when it really shouldn't. Who else is going to buy the popcorn and movie tickets if John isn't? (Okay, obviously the government doesn't buy popcorn and movie tickets, but you get the (motion) picture.)
As consumption decreases, so does "utilization of resources." So no matter what, we are looking at an inefficient use of all available production factors. But if the government steps in, the lesser of the two evils of inefficiency will ensue. We can't let the perfect get in the way of the good.
Well if there is a movie theater without sufficient demand for it, it should go out of business so all the resources invested in the movie theater can be reallocated to things that people want. Why are movie theaters and popcorn companies entitled to money? They only exist to fulfill a demand.
It takes time for resources to be reallocated, and during that time people are unemployed and etc. But government interference merely makes sure that the resources will never be allocated to productive uses. Instead, they are used inefficiently over the long term (whereas the resources would have been reallocated in the free market).
Not to mention that the government spending just pushes the government into further debt that must be repaid.
Regardless, saving money leads to investments that are the source of economic growth. In order to produce, one must accumulate capital (save).
When people are broke and in debt, they need to lower consumption and save money. If they instead borrow more and keep spending, for a time they will be better off. But they are just prolonging the inevitable and making themselves worse off in the long run. That's exactly what America is doing now. Trying to push the recession into the future by borrowing and spending, meanwhile setting up worse problems in the future.
If we stopped spending and borrowing, we would have a bad recession in the short run, but our future would be much brighter.
Spending vs. saving and borrowing vs. saving are two totally different propositions. Borrowing money to consume is not something we should do at all for the reasons you cite.
As a whole though, we should be spending more than we save for the reasons in my last post. Granted, it is very difficult to convince people who are losing money in a recessed economy that they should be a higher proportion of their income, but if everyone spends a little more, we can work our way out this mess more quickly. Saving will not do this.
Excessive saving, as we have already started to see, directly affects the money supply, which in turn has a very negative effect on deflation. With people saving much more than they spend, we are risking a downward deflationary spiral–an unstoppable vortex–that cannot be easily righted.
Consider this: Sure the movie theater doesn't have a right to demand, but it employs people. Those people get paid and become consumers. When people start saving, they remove money from the economy. If the movie theater goes under, and its workers become unemployed, there is even less money available to be spent, so prices go down, and more firms go under, as people buy less. Everyone starts to save more, everyone starts to buy less, and you start getting dangerously close to a critical low in total income.
I agree, resources should be allocated per the free market; it is most efficient. But reaching the point just described would require decades to fix and is undesirable by everyone. Like I said, don't let the perfect be the enemy of the good.
It's the fact that the government prevents the recovery that we need. I'm making the perfect the enemy of the bad.
Americans can't spend anymore without borrowing because the average American is broke and in debt. He needs to save to pay off his debts and rebuild his savings.
Remember also that saved money is eventually spent regardless, and the saved money leads to economic growth through investment.
Funnily enough, in a fractional reserve banking system, saving actually increases the money supply (if it is loaned out; for each dollar saved the bank can lend out like 10 or 100 dollars).
However, there would be no deflationary spiral. The market will reach an equilibrium. Prices need to fall because they were inflated during the boom where everyone thought they were rich. Now people see they are not as rich as they thought, so they don't buy as much stuff and prices fall.
We need to go through a period of low spending and high saving to rebalance the economy. It might seem like a deflationary spiral, since prices are falling, but that will only be because of the way prices were massively inflated in the first place. If companies go out of business during this (because they can't sell products at such a low price), it means that the market needs to reallocate those resources. This would be a painful period, but it would make us better off in the long run, instead of what we are doing now which makes the oncoming crash worse.
Also, just because a company has employees does not mean they deserve money. If the company fails, that is saying that the employees would be better utilized elsewhere, and eventually they will get a new job.
Overall people spend if they value the good or service they are buying more than the prospect of investing their money (and spending it in the future). If people lower spending, companies the failing is just the economy rebalancing to what people now desire.
Question: Would you rather spend your money or save it?
I don't disagree with anything you say. Economically speaking, your arguments are quite strong and very trusting in the free market, which I trust almost as much as you do (I'm not being sarcastic, I really do trust the free market).
The problem is (and this is obviously the point at which there really is no perfect solution to our crisis) that the human cost of having a "reset" period would be enormous. Massively high unemployment (which would ensue in your laissez-faire scenario) would devastate millions of people. People would be unable to afford food, shelter, education, etc. You argue that this would make the economy more efficient? How efficient is it when a whole generation cannot afford to attend college or when an engineer with 50 years worth of experience is laid off right before he qualifies for retirement?
I anticipate that you will say that as people become less able to pay for goods and services, prices will naturally drop, so said goods and services will then become affordable. Easier said than done. Remember, the firms who would be dropping their prices are also massively in debt. It will be a very long time until they can drop prices to match true consumer demand, because they themselves are going to take all the income they can get (price also has a natural inertia in the reduction direction).
So, these firms should go out of business? I don't disagree. But we're talking about human costs again. What is the human cost of universities closing, or of grocery stores, bookstores, museums, symphony halls, hardware stores, and yes, even movie theaters? Pure capitalism works by the numbers. To that, there is no question. But does it always work for people? The answer is no.
Well, the government action is only delaying the inevitable. There has to be a crash, and the government interfering and taking on more debt will only make the crash worse.
We got into this mess by borrowing and spending too much. We can't fix it by more borrowing and spending, and that will make the problems worse.
Well, the government action is only delaying the inevitable. There has to be a crash, and the government interfering and taking on more debt will only make the crash worse.
We got into this mess by borrowing and spending too much. We can't fix it by more borrowing and spending, and that will make the problems worse.
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