The neo-Keynesian sees two fundamental alternatives in fiscal policy, known by the misleading terms of "austerity" and "stimulus." Austerity is some combination of spending cuts and tax increases; stimulus is some combination of spending increases and tax cuts. Both are a muddle.
I of course have a completely different way of looking at it. On one side there is shrinking the government, meaning some combination of spending cuts and tax cuts; and on the other side there is growing the government, meaning some combination of spending increases and tax increases. One works and the other makes things worse. Of course, our government is aggressively pursuing the one that makes things worse.
Those looking for some real information on which sort of economic policy works would do well to join me in reading the recent excellent biography of Calvin Coolidge by Amity Shlaes. At least as regards domestic economic policy, Coolidge was literally the anti-Obama -- he did the exact opposite of everything Obama has done, or would have done had he been president in the 1920s. While Obama has presided over an explosion of Federal spending, particularly handouts of various sorts, and endlessly advocates for higher income tax rates on high earners, Coolidge's entire focus on the domestic front as president was on cutting spending and cutting taxes.
A few examples to give some flavor of Coolidge's approach:
- On June 30, 1924, at a speech to assembled government bureaucrats, many of whom were pushing for bigger budgets for their agencies, Coolidge instructed them that they were not allowed to advocate before Congressional committees for funds other than those approved by the President: "I regret that there are still some officials who apparently feel that the estimates transmitted to the bureau of the budget are the estimates which they are authorized to advocate before the committees." He then made this statement of his own position: "I am for economy. After that I am for more economy. At this time, and under present circumstances, that is my conception of serving the people."
- Coolidge's top legislative priority was getting tax rates lowered. In 1924 he succeeded in getting the top Federal income tax rate lowered from 46% to 25%. According to Shlaes (p. 320) the resulting decline in Federal income tax revenue was only 5% in the first year.
- Coolidge's top priority for allocating his own time was to meet with his budget director, Herbert Lord, to figure out ways of cutting spending. An example was instituting various incentives and rewards to departments that submitted reduced budgets, such as creation of the "Two Percent Club" for departments that trimmed their budgets by that much. Federal spending was actually lower in nominal dollars when Coolidge left office than when he entered.
- During Coolidge's presidency, Congress came up with endless plans to spend lots more money. The biggest items of the times were various "bonus" schemes for World War I veterans and plans for subsidies and price supports for farmers. Coolidge engaged in every sort of obstruction, including numerous vetoes, to keep these spending plans from getting through, and largely succeeded.
And how did the economy do? Shlaes summarizes the state of the economy in 1925, after four years of Harding and Coolidge spending and tax cuts, at page 331:
Coal prices were stable and employment was so high that workers were scarce. Wages rose, even though union membership and certainly union strikes were down. The Dow Jones Industrial Average was now inching above [a record] 130.
Well, now we have exactly the opposite in economic policy: a spending explosion, aggressive advertising by the government for its own expansion, persecution of those who advocate spending restraint, higher taxes and the push for still higher taxes. Just compare Coolidge's praise for budget cutting to the Obama administration's reaction to the recent sequester, where the whole idea was to make a minuscule 3% spending cut as difficult and hurtful as possible. And of course we have an endlessly sluggish economy. What is the thinking? Perhaps we should look to Larry Summers (former President of Harvard, Secretary of the Treasury under Clinton, head of the National Economic Council under Obama - now there are some credentials!) writing in the Financial Times on June 2:
[T]he US and other countries will not benefit from further fiscal contraction directed at rapid deficit reduction. Not only will output and jobs suffer. A weaker economy means that our children may inherit an economy with more debt and less capacity to bear the burden it imposes.
Got that? If the government cuts spending, the result will be a weaker economy that means "our children may inherit an economy with more debt." The reason you can't understand that brilliant logic is that you have not been President of Harvard and have not been head of the National Economic Council! Our supposedly intelligent leaders literally don't know what they are talking about and say the most preposterous things. And yet they have control of the large majority of the outlets of the media and spread this ridiculous nonsense endlessly.
Well, it can't be that both increasing spending and cutting spending are beneficial policies for the economy. If one is right, the other is wrong. I know which it is. Barack Obama and Larry Summers do not.