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Richmans' Trade and Taxes Blog
Keynesian Economists Offer No Solution to the Deepening Recession
In the Wall St. Journal of June 21, 2011, Prof. Alan S. Blinder of Princeton U. opined that “Right now, I’m worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes’s teaching, government spending destroys jobs.” He asks, “How exactly, could more government spending ‘kill jobs’? and “ [H]ow is it that public purchases of computers destroy jobs but private purchases of computers create them?”
In the first place Keynes’s teaching was shown many decades ago by Prof. Milton Friedman, Nobel laureate, of the University of Chicago Prof. Franco Modigliani, Nobel laureate, of Harvard and other economists, to be wrong about the consumption function that Keynes assumed. As a result, as we pointed out in this space, a week ago, there is no such thing as the Keynesian multiplier. It took workers to make the computers and when they have been produced and sold, the stimulus ends. As soon as government purchases end, any employment created by the government order comes to an end. Pres. Obama’s stimulus plans created jobs only while the spending continued. As soon as the spending wound down, GDP went down.
Prof. Blinder’s choice of computers in his example was unfortunate. All the computers sold in the U.S., are produced abroad, mainly in China. While companies like Apple, Dell, Hewlett Packard, and many others make some things in the U.S. and make profits on the computers, et. al., they import from their subsidiaries abroad, they have ten times as many employees abroad than they employ in the U.S. If the government purchase of computers stimulated employment, it was in China, not in the U.S.. Using employment as a criterion, the companies mentioned are Chinese, not American.
Prof. Blinder does admit that it is possible “that the taxes necessary to pay for the government spending destroy more jobs than the spending creates. That’s a logical possibility, although it would require extremely inept choices of how to spend the money and how to raise the revenue.” Exactly! With government spending other people’s money, it has no incentive to ensure benefits exceed costs. Government does accomplish some good but it rarely does so efficiently. Look at what it spent the Recovery Act money on. It took effect on February 17, 2009. As of Mar 17, 2011, it disbursed $655 billion. Of what it spent, $186 billion was spent on personal entitlements such as Medicaid, $84.2 billion; family services, $26.8 billion; unemployment insurance, $60 billion, agricultural disaster relief, $819 billion, and economic recovery payments, $13.8 billion. $260 billion was spent on tax benefits including the Making Work Pay credit of $400 per individual, $89 billion; other individual tax credits, $122.5 billion; tax incentives for businesses, $33 billion. The other major category is Contracts, Grant, and Loan Programs which spent $82 billion on education, $28.2 billion of transportation, $25 billion on energy-environment, infrastructure, only $20 billion, housing $15 billion, health $13 billion, R&D, science $9 billion, and job training/unemployment $3.9 billion.
It is hard to imagine a worse stimulus plan. Indeed, it is hard to distinguish it from Pres. G.W. Bush’s and Pres. Obama’s budget allocations and budget deficits from 2001 to 2011. A few more entitlements, perhaps. To suggest that another program like the ARRA of 2009 is necessary as Prof. Blinder appears to do, joined by many other Keynesian economists, is really a “particularly wrong-headed idea.” They have learned nothing from the experience of the Great Depression which showed that there is no Keynesian multiplier, which the decline in last quarter’s GDP confirms. Or one could say that the multiplier of increased government spending is one.
Prof. Blinder’s solution is “a modest fiscal stimulus program specifically designed for maximum job creation…a tax credit for firms that add to their payrolls…combined with a serious plan for reducing future deficits.” We don’t believe it would have any effect at all, any more than the ARRA of 20009.
There is no secret about what needs to be done. We have written about it on this site for years. Private investments in manufacturing must be encouraged. To do that, much of the manufacturing we outsourced abroad must be returned to the U.S. This requires more than doing the same foolish policy over again.
We must make the U.S. once again an attractive country in which to produce manufactured goods. The U.S. should impose the single country scaled tariff that all countries experiencing large chronic trade deficits with a trading partner have the right to impose regardless of whether its trading partner is engaged in mercantilist practices (which we believe) or its currency is undervalued ( which Paul Krugman believes. The tariff rate is based on the size of the trade imbalance and the rate declines as trade is brought into balance. We oppose the deliberate devaluation of the dollar against the world’s countries. There are many countries with which we have no trade imbalance. Why should we make it difficult for them by employing a mercantilist practice ourselves, devaluing our currency as so many claim China is doing. We have chronic trade deficits with China, Japan, Germany among our large trading partners and with some OPEC countries. The dollar would once again be the world’s standard. And we would stop enabling our enemies to grow at our expense.
We must restructure our tax system by eliminating the corporate income tax and integrating it with the personal income tax. Capital gains should not be taxed if the proceeds are reinvested, called a roll-over. If they are consumed, they should be axed as ordinary income. We must end the anti-market and anti-fossil fuel policies which the environmental extremists have forced on our country. The new sources of natural gas like shale should be developed; they promise a future of complete energy independence. We should encourage drilling on public lands (We can use the revenues!) and off shore in the Atlantic, Pacific, the Gulf, and in the Arctic. We should stop subsidizing inefficient vehicles, inefficient transportation systems, and so-called green sources of energy. We should stop subsidizing the insulation of homes and buildings. If it is worth doing, the market will provide sufficient incentives. We estimate that the foregoing policies would create millions of jobs and restore full employment.
Comment by , 6/30/2011:
None of the people who are in a position to help solve our economic problems feel any pain whatsoever as a result of those problems. There is no "recession" in Washington, D.C.. Business is booming for those who are lucky enough to work for the government. Even pay raises continue for them, while wages stagnate for the rest of us.
Many of the so-called Republicans are merely opportunists, who have no intention of rocking the boat or pushing any meaningful legislation. The liberal/progressive Democrats are generally anti-commerce and despise manufacturing in particular.
I have no hopes that our current federal government will do anything to restore fiscal sanity or to bring back manufacturing. Our only hope is to install a majority of fiscal conservatives in Congress who will be able to fix the economy and than, perhaps, implement some form of "balanced trade" to bring back manufacturing. Restoring fiscal sanity by controlling spending is the primary objective of the Tea Party movement.
I have been encouraged by the discovery of this website. As far as I know, the Richmans are the only credible group who are advocating a sensible plan for restoring U.S. manufacturing. If we are fortunate enough to wrestle control of our government away from the liberal/progressives in 2012, the Richman plan for balanced trade will become a viable model for bringing back American manufacturing and the middle-class.
I have completed reading the first half of "Trading Away Our Future" by Professor(s) Richman and highly recommend it. It is well written and clearly explains our limited options for restoring U.S. manufacturing.
Response to this comment by Bruce Bishop, 6/30/2011:
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