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The Economic Playbook- What Works and What Doesn’t

Thursday September 29th, 2011   •   Posted by Stephanie Freedman at 12:16pm PDT   •  

The Economic Playbook

CEI recently wrote an article discussing a statement made by Former Obama OMB Director Peter Orszag:

To fix it, (the economy) “We need ways around our politicians. The first would be to expand automatic stabilizers—those tax and spending provisions that automatically expand when the economy weakens, thereby cushioning the blow, and automatically contract as the economy recovers, thereby helping to reduce the deficit.”

The article offers a rebuttal:

Orszag has it backwards. Recessions are the worst time to raise government expenditures. Decreasing the resources in the market during an economic downturn only delays the recovery and increases debt, which in the long-term can be even worse for the economy (see Greece for more details). This Keynesian concept is straight from the Hoover-FDR playbook that sank our economy into the dismal 1930s and ’40s. (Contra Krugman myth, Hoover increased spending from 1929-1932 by 50 percent from $3.1 billion to $4.7 billion.)

Orszag should take his cues from the post-war depression of 1920-21, the one with worse unemployment in the first year than the Great Depression. President Harding ignored calls for increased government, slashed spending from $6.4 billion to $3.3 billion reducing the size of government by almost 50 percent. The economy recovered in less than a year and led to rapid growth for the rest of the decade.

The article quotes Senior Fellow Robert Higgs:

 As the Independent Institute’s Robert Higgs has already pointed out, consumer spending has already recovered to pre-recession levels. It’s investment that’s continued to tank. Why? Maybe because investors have no idea what hiring and business conditions will look like in the future due to President Obama’s regulatory onslaught – 75 new major rules since 2009 including Dodd-Frank and Obamacare.

With all due respect Mr. Orszag, this system of taxation and spending will not stabilize the economic system. The article articulates perfectly:

People are just better at allocating resources than governments. Allowing top wage earners to keep larger portions of their income will increase investment, which will ultimately pull our economy out of this recession.

Read Full Article Here 

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September 2011