Towards the end of his book, Alan Blinder explores the federal budget deficit so I figured I post a video that answers whether reducing government spending is good for the economy.
Is the professor's opinion biased? Are there examples of spending cuts that led to weaker economic growth in developed economies?
ohhhh boy. To be blunt, not even considering 'bias,' I found this video to be atrocious. I never would endorse the view that "across the board cuts are good for the economy" for the same reason that I would never endorse the view that "government spending will necessarily be good for the economy": the situation is just not that simple.
ReplyDeleteThe professor, however, cherry picks examples (really bad ones too, there are good ones out there), and then falsely attributes economic resilience or prosperity to his examples. In short, the professors opinion is definitely biased, but more importantly, it's baseless.
I also think that he is bias and his examples do not necessarily represent the point he is trying to make. This is because the results of cutting spending back in these countries and the accelerated economic growth that they show cannot be attributed to just one factor/relationship.
ReplyDeleteokay, because the professor did very little to back up his crappy claims, I don't want to be a hypocrite. Here are the three major examples he uses:
ReplyDelete1. Canada: Davies attributes Canada weathering the 07/08 GFC better than other nations as a result of 10% across the board cuts in the 90s. That's ridiculous. For one, there are many many reasons why Canada did so well in '08, any economist who attributes a highly complex outcome so strongly to one action almost 20 years earlier should be treated with intense skepticism. Moreover, actual factors that affected their success are often considered as: 1. limited exposure to the MBS market 2. A strong regulatory environment not seen in the US or UK 3. Very early action on the part of bankers (a quote from National Bank of Canada CEO Louis Vachon: “By the time Lehman went under in the fall of ’08, we’d been in crisis mode for a year.”)
2. Sweden: could Davies pick a worse state to try and argue for cutting government spending? Sweden is the so-called socialist mecca that libertarians love to hate, why would he do this to himself? Davies refers to vague "various steps" taken to address the public spending that has put Sweden in their cushy position today (I presume he is implying these steps are cuts to spending). Now they are looking to cut taxes. Well, that's because they have one of the highest tax revenues globally. Again, too simplistic (if even remotely true at all) to say that they weathered the GFC because of actions in the 90s. If anything, it was government spending which helped insulate them in the crisis: Sweden nationalized some major banks during their crisis in the 90s, they spend a buttload on education, health, ad general welfare, etc...
3. Post-WWII America: Davies says there was a fear that reducing government spending after a period of so much of it would result in the economy flopping. I suspect that Keynesian economists at the time didn't have this fear. Here's why: when the economy slumps, the government can stimulate it with smart, efficient spending, but in times of economic prosperity, the government should contract so they A. don't encourage bubbles and B. are able to stimulate the economy again when it has a downswing. This is roughly what happened with WWII. Pre-war was the Great Depression. We came out of this as a result of immense government spending on the war and social programs (The New Deal). After the war the government pull back because the economy had stabilized.
Austerity in times of recession is being proved right now to have massive detrimental effects economically (UK austerity led to -.5 to 1.0% impact on GDP according to PM David Cameron's own office), and massive burden to public health. Davies is just wrong. The data doesn't back him up.
It's pretty clear that these guys are pretty biased given that learliberty.org is a project of the Institude for Humane Studies which is governed by Charles Koch.
ReplyDeleteAlso, speaking of the New Deal, people should take a look at this study that shows that "the boom, not the slump, is the time for austerity." Hopefully this will give people a better idea of how the left would approach this issue.
http://www.rooseveltinstitute.org/policy-and-ideas/big-ideas/boom-not-slump-right-time-austerity
I think his point makes sense because i belive reducing government spending can lead to an increase in economic growth because it will free up resources/finances. Besides, the summary talks about examples of Canada, New Zealand, Sweden, and America where government spending reduction actually led to an increase in economic growth.
ReplyDeleteI don't think I have to say more about how biased the professor is in this video. Saying economic growth is driven by government spending alone is ridiculous. It is just one of many factors that drives the economy. As Rasheed said, being on a extreme ends for government spending may not be a very good idea. Beside being a very sensitive economic issue, it is big political issue as well.
ReplyDelete