A false choice

Dean Baker, the "co-director" of an organization called the Center for Economic and Policy Research should know better. Writing on Politico today, Baker announces that "the stimulus has performed pretty much as expected." He points out that the stimulus was really a net of only about $150 billion of additional demand for each of 2009 and 2010 and that it was clearly not enough to make up for the major decline in demand that resulted from the financial crisis. Then he concludes by claiming that if the country brings its debt down over the next thirty or fourty years, the result will be an economy "free of debt and jobs". Baker is clearly a man who pretends not to understand basic economics; yet, I am sure that does.

First, let's look at what is wrong with Baker's analysis. the simple answer is "everything", but a more detailed response is called for. Baker operates on the assumption that only the government can provide the needed demand to improve economic conditions. That is why he claims that a reduction in government spending will lead to a decline in jobs. but clearly this is incorrect; Baker has overlooked the concept of growth in the private sector. In other words, as the government takes less of the capital of the country for transfer payments and allows more to be available for business investment, there will be a resulting surge in private investment and the many jobs that such investment brings. these jobs will not be dependent on the whim of the government; they will be long lasting and independent. They will provide support for the middle class that has been so battered by the recession.

Think of it this way: an entrepreneur has the risk of loss and the cost of operation of his business lowered when the tax rates decline, needless regulations are removed, and the likelihood of new regulation or cost imposed by the government is lowered. Such changes mean that the businessman will be able to see a greater chance of profit from a new investment. The result: more investment and greater growth in the economy. Greater growth translates into higher incomes and more jobs. That, in turn, translates into less need for government services for the needy so that government expenditures can further decline (provided that congress does not up spending on non-essential items.) Reduced government spending and greater incomes for the people mean higher revenues for the government and less need for taxes. That allows a further reduction in taxes, and the virtuous circle continues on.

For some reason, liberal economists all choose to avoid the dynamic nature of the economy and the concept of growth with its beneficial consequences. The choice is not between higher government spending with higher total demand in the economy on the one hand and lower government spending with lower total demand in the economy on the other hand. Indeed, that is a false choice. The true choice is between higher government spending/regulation and higher growth in the private sector. Strangely, the American people seem to understand the need for growth and reductions in government much better than these progressive economic "experts". The progressive vision for society is one where experts who know better help guide the people into a better life that will be more beneficial for all. the truth is that most of the progressive "experts" do not have a clue about what is better. Their choices are ideological, not practical. Baker's piece is just a very good illustration of this phenomenon.