10 thoughts on “Still A Jobless Recovery?

  1. Except the reason why the economy is rebounding is hardly Keynesian – while I haven’t run the numbers it would seem that there’s a direct correlation between Bush’s tax policy and economic growth. Most of the current line of spending has been in defense and future increases in social spending that won’t have any effect on the economy for years (and when it does it will be a negative effect rather than a positive one.)

  2. Look, if you want to argue that some tax cuts for the richer Americans to stimulate investment and for the middle class to stimulate consumption were the cause of any rebound, and not the massive public spending and insanely low interest rates, go right ahead. You’re not correct, but go right ahead.

    And to think that spending on defense will only have a long-term negative impact on the economy completely ignores history. In the late 1930s increased defense spending brought several European states out of the Depression, and the early 1940s saw increased defense spending bring the US out of it.

  3. And you’re omitting a key word from your analysis:

    “…future increases in social spending that won’t have any DIRECT effect on the economy for years….” You know as well as I that much of the investment world centers around predictions of future conditions. Greg Mankiw would be sad to see such an egregious oversight.

  4. I’d give you interest rates as a major factor, but not public spending. This isn’t Europe – public spending is relatively small compared to overall GDP. In order to produce over 7% economic growth you’d have to have the government directly purchasing a hell of a lot of goods and services. Except most government spending is on transfer payments rather than acquisitions, meaning that the short-term macroeconomic effect is rather insignificant.

    If anything, the amount of deficit spending is a long-term anchor on further economic growth – growth that occurred because of Bush’s supply side tax policies and the Fed’s low interest rates to spur economic growth.

  5. Government spending is an enormous percentage of GDP, from social security (largest off-budget) to the military to health care (gov’t pays about 40-46% of health care costs, and health care makes up around 15% of GDP). But if you want to hold the monetarist-classical line versus my monetarist-Keynesian line, that’s fine. At least we agree that Greenspan had a lot to do with the uptick, and that the current fiscal policy is going to come back and bite us in the ass in about 20 years when that deficit has had some time to accumulate interest as debt.

  6. Gotta point out, though, that Ricardian Equivalence should have come into play if a supply side tax policy hit at the same time as a deficit. Since apparently the economy is recovering under a deficit, I don’t think we can safely assume that tax cuts are the cause if Ricardian Equivalence is valid.

  7. JR,

    Look, if you want to argue that some tax cuts for the richer Americans

    We have a progressive tax system, hence tax cuts will benefit most those who pay most – the “richer Americans”. What’s wrong with that?

  8. The Ricardian Equivalence isn’t exactly a model I’d be willing to use considering that in order to achieve such a state, you’d have to assume that fiscal policy is worthless, that there’s some perfect credit model that doesn’t exist in the real world, and the model only assumes a lump-sum system of taxation.

    In other words, the Ricardian Equivalence theory rests on a model that’s only tangentally related to an actual modern economy, which is why it has no bearing on the current situation.

    The economic boom is directly related to supply-side factors, mainly a decrease in interest rates, a reduction in marginal rates, and an increase in consumer spending that have spurred market investment.

    Now, if the economy can sufficiently recover that debt won’t be so daunting – although I agree with those who say that Congress must stop spending before the debt does become a long-term problem.

  9. I don’t think Ricardian Equivalence discounts the importnce of fiscal policy. Rather, it demonstrates how fiscal policies that may not directly take effect for some time can indirectly affect the economy in the short run by affecting behavior.

    And Stan, you fail to notice the difference in the ways that targeted tax cuts enter the economy. When those with substantial savings receive tax cuts, they’re less likely to put that money into direct consumption, and instead will invest that money or, if Ricardian Equivalence holds (and that is certainly not a universally-accepted principle), they will continue to save in times of deficit spending. When those with less money get tax cuts, they’re more likely to spend that money directly (that’s why families with kids get a tax credit–it’s hoped that they’ll turn around and use that credit for tangible goods like food and clothes for their kids, thus both improving quality-of-life and stimulating consumption). If you want to encourage long-term investment or bump up spending on industry, then target to the rich. If you want increased consumption, skip the trickle-down crap and cut to the chase–give it to those that will use it immediately, and speed up the multiplier effect.

    And, lest we forget, an income tax cut is NOT a progressive tax cut. The lower income brackets pay more in payroll taxes than in income taxes, meaning that an income tax cut will benefit the rich disproportionately, as it ignores the real tax burden for most people.

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