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Yes, Alan Blinder, "Stimulus" is a Dirty Word

Posted By David Weinberger On June 27, 2012 @ 12:30 pm In Economics | Comments Disabled

Whenever misguided economic policy advice crops up, it’s imperative to correct it. The latest comes from Princeton economist Alan Blinder [1]. He advocates for more stimulus, especially more education spending, and pleads for higher tax rates on the “rich.” These policies are mistaken.

He begins by contending that, because interest rates for government borrowing are so low, construction workers are out of work, and there’s such desperate need for infrastructure repair, government should deficit spend in the short term. His argument is that this is both effective and cost effective:

In the near term, we need modest stimulus, focused tightly on creating jobs. But that stimulus should be paired with a vastly larger dose of long-run deficit reduction—perhaps 10 to 20 times as large as the stimulus—over the 10-year budget window.

Creating jobs would be a sensible plan if government could do so that simply. But as we’ve explained [2] over [3] and over [4], it can’t [5]. Government spending financed by borrowing merely transfers resources from one place in the economy to another, with no net increase in total jobs. To put an idle factory in Michigan to use, government must first take resources from somewhere else, say Minnesota, requiring an equal idling of a factory there. This is why the economy has performed so poorly despite government claims that the stimulus “created” millions of jobs. Recall that with the stimulus, the Administration promised unemployment would not go above 8 percent (it went as high as 10.1 percent).

As for infrastructure, where there’s genuine need, it makes sense to spend on it. But that does not mean it’s the federal government’s responsibility to do the spending, and it certainly doesn’t mean this kind of spending stimulates the economy. Infrastructure spending is (1) capital intensive; (2) slow to respond; and (3) still runs into the net jobs problem noted above.

For example, if a bridge is needed to facilitate people’s commutes so that they can spend more time working and being productive, that benefits the economy. The result of the bridge facilitates productivity growth, which means economic growth and jobs. But let’s not pretend the process of constructing a bridge stimulates or creates jobs in the short term. This kind of spending takes time to mobilize. Remember President Obama’s assertion regarding “shovel-ready projects,” which he admitted weren’t so shovel-ready after all?

Infrastructure spending still must be financed from somewhere, meaning that dollars are taken from another place in the economy where they otherwise would have been employed.

Blinder continues, saying that “we should be doing a much better job of building a better educated, more productive work force for the future.” Few would disagree with that. Where the debate comes in, however, is determining how we do so.

If he’s hinting at more federal spending, that may sound good, but consider the facts. After adjusting for inflation, government education spending per pupil has more than tripled since 1970. At the same time, total real federal spending on K-12 education has gone from under $10 billion to over $71 billion. [6] Yet during this time, student test scores have remained flat. Perhaps rather than focusing on federal spending, we should encourage more local control to concentrate on reforming the competition structure. And we might ask parents about their roles, too.

Mr. Blinder finishes by insisting that we need tax reform.

Republicans often focus on lowering the top income tax rate…But the evidence is against the GOP on this one. We’ve experimented with moving the top rate up or down a few percentage points several times. Under President Clinton in 1993, we raised it to 39.6% from 36% and one of the greatest periods of prosperity inU.S.history followed. Then in 2001, under President George W. Bush, we cut the top rate to 35% from 39.6% and…well, you know what followed.

Certainly we can agree that tax reform is needed, but Mr. Blinder should double-check his facts.

First, no proponent of tax rate reductions advocates cutting the rate for merely top earners. In fact, every time in history that tax rates have been reduced, they’ve been lowered for all income levels [7].

Second, as we’ve noted before [8], the Clinton boom followed about four years after he raised tax rates, and resulted in part from an opportune cut in the capital gains tax rate. Clinton hiked taxes, especially the top rates, in 1993 and cut the capital gains rate in 1997. Here’s the historical record: From 1993–1996, a time when the economy was recovering from recession, so expected growth should be strong, real economic growth averaged 3.2 percent and 11.2 million jobs were added. During the period 1997–2000, real economic growth averaged 4.2 percent and employment increased by 11.5 million jobs.

Heritage’s J.D. Foster explains [9]:

The first period, from 1993 to 1996, began with a significant tax increase as the economy was accelerating out of recession. The second period, from 1997 to 2000, began with a modest tax cut as the economy should have settled into a normal growth period. The economy was decidedly stronger following the tax cut than it was following the tax increase.

The Bush rate reductions, which were slow to kick in but were accelerated in 2003, created more than 8 million jobs between 2003–2007 [10].

The prescription advocated by Mr. Blinder does not square with empirical evidence. If we want a strong economy, we should cut government spending, restructure education, simplify the tax code, and above all eliminate the threat from Taxmageddon [11]. If the government would just do less harm, we would have a lot more job creation.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2012/06/27/yes-alan-blinder-stimulus-is-a-dirty-word/

URLs in this post:

[1] Princeton economist Alan Blinder: http://online.wsj.com/article/SB10001424052702304765304577478561041473358.html

[2] explained: http://blog.heritage.org../2011/08/22/a-fifth-keynesian-stimulus/

[3] over: http://blog.heritage.org../2011/09/20/does-supply-create-demand/

[4] over: http://online.wsj.com/article/SB10001424052748703481004574646551469288292.html

[5] it can’t: http://blog.heritage.org../2011/10/05/supply-and-demand-part-ii-the-money-supply/

[6] adjusting for inflation, government education spending per pupil has more than tripled since 1970. At the same time, total real federal spending on K-12 education has gone from under $10 billion to over $71 billion.: http://www.heritage.org/research/reports/2008/09/does-spending-more-on-education-improve-academic-achievement?query=does+spending+more+on+education+improve+academic+achievement

[7] In fact, every time in history that tax rates have been reduced, they’ve been lowered for all income levels: http://blog.heritage.org../2011/12/12/fact-checking-president-obama-on-trickle-down-economics/

[8] as we’ve noted before: http://blog.heritage.org../2010/10/20/hoover-fdr-and-clinton-tax-increases-a-brief-historical-lesson/

[9] J.D. Foster explains: http://www.heritage.org/research/reports/2008/03/tax-cuts-not-the-clinton-tax-hike-produced-the-1990s-boom

[10] created more than 8 million jobs between 2003–2007: http://www.heritage.org/research/reports/2011/09/setting-the-tax-record-straight-clinton-hikes-slowed-growth-bush-cuts-promoted-recovery

[11] Taxmageddon: http://www.heritage.org/research/reports/2012/04/taxmageddon-massive-tax-increase-coming-in-2013

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