The other day I was writing yesterday's "The Elusive Growth" and thinking about how people look at economic policy. A lot of people say stimulus spending does not help the economy recover. I think say that because we tried stimulus already. But I'm not just talking about the Obama stimulus.
Think big picture. Long term.
I remember LBJ on TV (for a State of the Union speech, maybe?), apologizing to the American people for having a budget over a billion dollars or something. I don't remember the number: a billion dollars, or a hundred million, or a hundred billion or some big round number like that. And I don't remember the context: Was it a budget number, or the deficit, or the debt, I don't remember. But I remember LBJ on TV talking about it. Lots and lots of government spending. And it was all stimulus.
I remember Reagan campaigning on the idea that government was too big. And then I remember the massive budget deficits of the Reagan years: Lots more government spending. And it was all stimulus.
I remember Ross Perot running for President in 1992, worrying about the government debt. But that was all stimulus spending, even if we didn't call it by name.
And the deficits of George W. Bush and Barack Obama. All stimulus.
Big picture, long term, we have been using government spending as a way to stimulate the economy for decades.
All the while they were increasing spending, they were apologizing for it or claiming they were trying to cut spending or whatever, and after a while people sort of stopped believing what government officials were saying.
And with all of that, what happened in the economic analysis is that we had several decades of what is today considered "excessive" government spending.
It was all stimulus. It did not work.
Or, hey, maybe it did. Maybe we would have been in a Depression long ago if not for all this government spending. But either way, the economy is not in good shape today and the economy has not been in good shape for years. So either way, all that government spending didn't fix the problem.
 |
| Graph #1: Gross Federal Debt |
How does all that debt look, when you look at the growth rate percentages?
 |
| Graph #2: Percent Change in Gross Federal Debt |
Low, near zero after World War II and in the 1950s, and not much higher in the 1960s. Then up, up and up through the 1970s and into the '80s, to a peak in about 1984. Then the growth of the Federal debt slowed (from a remarkable 20% increase) to just about a dead stop late in the Clinton years. Then again, an up-trend.
Why the trend-line does not dip below zero around 1999-2000 when the Federal budget was balanced, I can't say. Probably has to do with creative accounting.
Now, the iffy part.
Graph #2 above has a pretty good hump in it there after 1966. That's the same time we had a pretty severe bout of inflation. So I got wondering how the debt would look if I took the inflation out of it.
I took the Gross Federal Debt (from Graph #1) and divided it by the GDP Deflator to remove the inflation. I'm not sure that is valid economics. I think debt already shrinks on account of inflation. So maybe I'm double-counting. Something like that.
But I did the calculation anyway. And I was impressed with the result. (Thus, the title of this post.)
 |
| Graph #3 |
If this graph is worth anything (and having written tomorrow's post, I can say I think the graph is valid for some uses) what it shows is that we have engaged in a massive economic stimulus program since 1981.
Isn't that graph interesting?
5 comments:
Karl Smith is a bright guy, but a distressingly careless blogger. He put up a genuinely awful post yesterday in which he made two huge conceptual errors. 1) He grotesquely mis-characterized socialism, and 2) he used aggregate graphs to make a point which sort of fades away when you think about what's behind the numbers. For this he was roundly criticized, and even ridiculed, in comments.
You've done something similar here.
First off, you are not talking about stimulus. I gave you the definition yesterday. To insist that you are is a mischaracterization of stimulus. Communication becomes very difficult if the meaning of a word is stretch to include concepts that don't belong in that word You are talking about expansion, not stimulus.
So - yes - expansion is expansionary. This should not surprise anyone.
Second, you are taking the aggregate number - deficit - to be a measure of spending, without giving any thought to the revenue side. If you take a good look, you'll discover, in Karl's words, that "spending is pretty much never the cause of budget deficits." He has this exactly right.
What we have engaged in since 1980 is a bit of expansion - horribly flawed things things like Star Wars (a gift to the M-I-C at public expense), Bush's misbegotten adventures in Iraq and Afghanistan (ditto, and probaby havnng a 0 multiplier,) and Medicare part D (a gift to big pharma at public expense)- and a whole lot of revenue slashing.
The result has been a pretty impressive public debt. For a variety of reasons, we have simultaneously amassed an absolutely crushing private debt. We also have enormous trade imbalances, year after year. This is the three-headed dragon that is likely to destroy us.
WASF,
JzB
Talking of Reagan, see what Pierre Rinfret had to say about Reaganomics
Quote:
It was 1980. I received a phone call from one John Sears, campaign manager for the Ronald Reagan drive for the Presidency. John Sears had managed the Presidential campaigns of Richard Nixon. He asked me to come to California to meet Ronald Reagan since "We need new ideas and you always have them". I told him I was not particularly taken with Ronald Reagan but he said "Do me a favor as an old friend, come anyway" I said I would go to California.
Clonal,
Thanks for the link. Hey, in Part 4, Rinfret writes: "Who then invented the concept that lower taxes could stimulate economic growth and, therefore, increase Federal tax revenues? Not Ronald Reagan nor Laffer but Jack Kennedy, Walter Heller and Arthur Okun some 16 years earlier!"
Check this out.
Also in Part 4, that scan of page 72 of the Heller book, written in 1966... Notice the sort of giddy confidence in the writing? Reminds me of the TIME magazine article on Keynesian economics from December 1965. Here. It presents a different view of the world than we have today. Optimistic.
The guy scans things the way I do: a little crooked.
Final thought -- that scan reads in part: "Thus the rationale of the 1964 tax-cut proposal came straight out of the country's postwar economics textbooks. And in turn the tax cut itself -- recently described by Dexter Keezer as 'a triumph of high-test Keynesian economic therapy' ..."
The economy was already growing well in 1964. Keynes and Jazzbumpa would have recommended balancing the budget in 1964 I think. But the Keynesians recommended deficit spending to stimulate even more growth: The Full-Employment Budget. (See the TIME article.)
What a Keynesian says and what Keynes said are often two very different things.
The thing is - revenues and expenses tracked very closely through the 60's, until the '69 recession.
The deficit in '64 was trivial.
The idea of lowering taxes to raise revenues is absurd at current tax rates. At the 91% marginal tax rate back in the day, lowering tax rates probably made some sort of sense. the Laffer curve does have a maximum. The practial problem is figuring out where it is.
Mike Kimel's work suggests somewhere in the 65 to 75% range.
Cheers!
JzB
Isn't that graph interesting?
Post a Comment