America, Give Austerity A Chance

Member Group : Jerry Shenk

The American government is not “starved” for revenues, but it should be.

The Internal Revenue Service and U.S. Treasury collect more taxes annually than any nation in history, but the government has spent $trillions more than Treasury receipts. Our national debt exceeds $30 trillion.

Nevertheless, urged on by the American left, Democrats are spending and think America must spend more.

They’re wrong.

When economist John Maynard Keynes wrote The General Theory of Employment, Interest and Money in the 1930s, the governments of most prosperous nations – and their debts – were small, certainly when compared to today’s government behemoths. Back then, ‘increasing aggregate demand’ using deficit spending was, at best, a plausible response to economic downturns. Today, gigantic, unwieldy governments here and in Europe – and their economies – are overwhelmed by massive debt.

The standard Keynesian answer to economic downturns – increased spending and the expansion of debt – assumes the willingness of bond markets to finance the increased debt at manageable interest rates. If the markets do not respond, Keynesian policies fail. In fact, because they inevitably involve government interference in markets, Keynesian policies have always failed.

Today, despite two huge recent Keynesian stimulus packages, by objective historical measurements – two consecutive quarters of economic decline – America is in recession.

Dr. Robert Barro, Harvard professor of economics and Stanford Hoover Institution senior fellow, has concluded that “fiscal deficits have only a short-run expansionary impact on growth and then become negative[.] … [T]he results from following this policy advice are persistently low economic growth and an exploding ratio of public debt to Gross Domestic Product (GDP).”

In fact, history proves two things: 1) that austerity works and 2) that Keynesian economists are not historians.

Since the beginning of the 20th Century there were numerous periods in American and world history during which reductions in government spending refuted the Keynesian model.

Keynesian economists never mention the depression of 1920-1921 or accurately explain what brought America out of it, because the facts don’t fit the Keynesian narrative.

From 1921-1922, President Warren Harding cut the federal budget by 48 percent. The economy boomed.

President Calvin Coolidge continued Harding’s fiscal prudence, spending less in 1928 than Harding did in 1922. America enjoyed nine years of budget surpluses and arguably the world’s best post-World War I national economy.

As World War II wound down, the United States cut spending by 75 percent. Spending as a percentage of GDP plunged from 44 percent in 1944 to 9 percent in 1948. Keynesians predicted violence in America’s streets

Horrified, Keynesian Paul Samuelson, later a Nobel Prize-winner in economics, predicted “the greatest period of unemployment and industrial dislocation which any economy has ever faced.” Instead, Samuelson advocated a gradual spending drawdown.

Thankfully, Washington ignored him.

The U.S. post-war economy thrived. There was no mass unemployment despite rapid demobilization of the armed forces. The numbers of unemployed did increase, but with a civilian labor force of 60.1 million, the 2.3 million unemployed reflected an unemployment rate of only 3.8 percent. President Harry Truman said, “This is probably close to the minimum unavoidable in a free economy of great mobility such as ours.”

Keynesians dismissed the postwar boom as an outlier. But the economy boomed again after the Cold War ended when overall federal spending fell from 22 percent of GDP in 1991 to 18 percent in 2000.  During the period, real GDP grew by 40 percent with an average annual growth rate of 3.8 percent.

More Barro, 2012: “Two interesting … cases are Germany and Sweden, each of which moved toward rough budget balance between 2009 and 2011 while sustaining comparatively strong growth – the average growth rate per year of real GDP for 2010 and 2011 was 3.6% for Germany and 4.9% for Sweden. If austerity is so terrible, how come these two countries have done so well?”  And: “… there is nothing in the overall [European] Organization for Economic Cooperation and Development (OECD) data since 2009 that supports the Keynesian view that fiscal expansion has promoted economic growth.”

Barro concluded: “[T]here is a lot to say on economic grounds for strengthening fiscal austerity in OECD countries.”

That applies to America as well.

In fact, America suffers from decades of over-promising, overspending, and over-indulging special interests. To avoid an economic crisis, America must give austerity another chance.