The Liberal Blue View From the Left
Author: Nick EstesRetired UNM University Counsel
How to Fix, and How Not to Fix, a Depressed Economy
Paul Gessing and I agree that America faces two big challenges: getting its long-term federal budget under control and getting the short-term back economy to full employment. Unfortunately, Mr. Gessing’s solutions are inconsistent with everything we know about fixing a broken economy.
First, we must get our people back to work. But you cannot do that by cutting government spending even further, as Mr. Gessing advocates. This is called “austerity” and it’s exactly what has crippled the European economy. These countries have reduced their government spending as a percent of their economies, with miserable results. Our unemployment rate is bad, at 7.6 percent. Europe’s is horrible, at 12.2 percent. Talk about turning us into Greece!
Europe has foolishly let conservative ideology trump hard-won experience. We have learned over the years that if consumption and investment suddenly plunge (as they did after the 1929 stock market crash and again after the 2007 housing bubble) government spending and well-targeted tax reductions can combine to revive the economy. This is not a theory; it is understood by virtually all economists.
The Great Depression finally ended because the government spent massive amounts of money to win World War II. This (and the draft) put Americans back to work. The sudden surge in private spending after World War II, which Mr. Gessing applauds, was indeed wonderful, and it was consistent with standard economics. The boom happened because everyone started buying the consumer goods they were denied during the war, in part using the bonds—the government debt—they had bought during the fighting.
But no comparable surge in private spending is on the horizon right now, so the last thing we need is to continue to cut government spending. We should end the scatter-shot “sequester” (our version of “austerity”) and spend more money where it would do lots of good: on infrastructure improvements and rehiring some of the thousands of teachers and public safety workers who are still laid off. Unemployment is still much too high and at the present rate it won’t improve for years. Intelligent government spending could restore employment in much less time.
No one is opposed to streamlining federal regulations, as Mr. Gessing also suggests. But let’s not forget these regulations stand between us and environmental pollution, dirty meat-packing plants, unsafe airplanes, etc. Perhaps we can make it a little cheaper to produce a given widget, but eliminating regulations would do little for recovery now when consumer and business spending is so low. No sane businessperson is going to pay workers to produce goods unless she is pretty sure someone is going to buy them, regulations or no.
In the medium-run, all forecasting shows federal deficits under control for the rest of this decade. The big reason is that there have been so many cuts that the federal budget will soon be smaller as a percent of the economy than it was under Ronald Reagan. The federal budget is NOT “out of control.” It increased with the recession but is now headed downward again.
For the long-run, after 2020, the deficit becomes a problem again, but primarily because of rising American health care costs, not “entitlements” generally. The big problem is that we pay twice what citizens in other countries pay for health care that is no better and, in many cases, worse.
Medicare and Medicaid are not the problem. In fact, they do a far better job than private insurance in controlling costs. But they buy healthcare for their beneficiaries from the U.S. private healthcare market – from private hospitals and expensive specialists – whose prices have been out of control for decades.
The key to eliminating our long-term deficits is to “bend the health care cost curve” downward. Common-sense reforms such as changing the way we compensate doctors and hospitals (like paying a single fee for the entire cost of an illness) and reducing exorbitant pharmaceutical costs (such as by limiting the length of drug patents) will go a long way to addressing this problem.
Social Security, on the other hand, is completely manageable. It’s slated to increase from 5 percent of GDP today, to 6.2 percent in 2030 and then level off forever. This rising cost can be covered by raising the salary covered by FICA taxes and by other modest adjustments.
We can achieve both short and long-term economic health by stopping mindless cuts to government spending and replacing them with intelligent investments, eliminating unfair tax loopholes, and getting a handle on the cost of health care in America.
The Conservative Red View From the Right
Author: Paul GessingPresident, Rio Grande Foundation
Restrain/Reform Washington to Overcome Future Economic Collapse
America’s national debt is a huge problem that, if not addressed, will lead the United States to economic ruin. After a temporary pause, the debt as a portion of the American economy is set to explode as the bills for so-called “entitlement” programs (Medicare, Social Security, and Medicaid) come due.
Currently, the focus is on growing the economy. Continuing high unemployment combined with low workforce participation mean fewer people working and paying taxes thus lower tax revenues.
Keynesians like Mr. Estes argue that increased government spending (and larger deficits) will spur the economy. They argue that government spending has a “multiplier effect” as it circulates through the economy and that this leads to economic growth. History and economic reality show that they are very wrong.
In reality, America’s economy has recovered more slowly from the recent economic crisis despite a major stimulus package for two basic reasons:
- The federal government is consuming and regulating more of the economy (meaning that it takes more available resources) than ever;
- The explosion of government regulations has hamstrung the market economy and jobs creation.
The federal budget has more than doubled since 2000. Back then, Washington consumed about 18 percent of the economy; today it consumes nearly 23 percent (an increase of more than 27%). The unemployment rate in 2000 hovered around 4.0 percent as compared to the current rate of 7.6 percent. Where’s the stimulus?
As if our recent experience were not enough to illustrate the failure of “government stimulus,” the aftermath of World War II provides another. In the wake of the War, federal spending rose to more than 40 percent of GDP during the War, was reduced to just 12 percent by 1948 to the consternation of Keynesians who argued that reduced government spending would lead to double-digit unemployment rates. In reality, unemployment remained under 4.5 percent in the first three postwar years — below the long-run average rate of unemployment during the 20th century.
Mr. Estes cites European “austerity” driven by “conservative ideology” to illustrate what not to do in terms of economic policy. I agree because Spain, the United Kingdom, France, and Greece — countries widely cited for adopting austerity measures — haven’t significantly reduced spending since 2008. These countries still spend more than pre-recession levels while France and the U.K. did not cut spending at all. If “austerity” means spending cuts, Europe has not experienced “austerity.”
The real problems in Europe are burdensome regulations and an overly-generous welfare state. Germany’s economy – deregulated under Gerhard Schroeder – is now the envy of Europe.
America’s political leaders must also address government regulations. According to Ten Thousand Commandments, a report published by the Competitive Enterprise Institute, Americans spent an astounding $1.806 trillion in 2012 compliance costs complying with federal regulations. This lost money does not increase wealth or pay down America’s massive debts.
There are certainly sensible rules and regulations, but there is a tendency for government bureaucrats to micromanage the economy at great cost to consumers and taxpayers. We all want clean food and a clean environment (both are clean and getting cleaner), but most new regulations are overkill.
How about entitlements?
Social Security’s problems were inevitable. As a “pay as you go” system of generational transfer – lacking any investment mechanism – the system was doomed to have serious structural problems once fewer people paid in than were receiving benefits. The problems are real and go beyond deficit implications. However, while Estes pooh-poohs this issue, Social Security will consume 30% more of the entire U.S. economy in a few decades than it does now.
Liberals like Estes propose tax hikes to pay for the program’s shortfalls, but the real problem is the lousy rate of return which amounts to about a third the rate of AAA corporate bonds for most retirees.
Medicare and Medicaid are in even deeper crisis, but the solution is actually simpler. We need to move beyond Washington’s “one-size-fits-all” mentality and allow the 50 states to experiment with innovative ways to improve care and reduce costs. To say that these government health care programs are mere purchasers of health care in a “free market” is laughable as governments now account for more than half of all health care spending.
More government spending will not help America’s economy in either the short or long terms. The Keynesian model has failed. It is time for our political leaders to make tough choices by deregulating the economy and reforming entitlements in ways that improve taxpayers’ return on our investments.