One of the many deleterious things about the Trump insurgency has been that it has wiped out of the public debate nearly all serious discussion about basic economic policy. I'm talking here about the very most fundamental question: Which is better for improved economic performance and success for a country -- low government spending and low taxes, or high government spending and high taxes? This simple question defines a fundamental divide between two different approaches to government's role. The high spending/high taxes side is exemplified by Official Manhattan Contrarian Worst Economics Writer Paul Krugman, and by the two candidates running for President on the Democratic side. (Here is a recent Krugman column belittling the idea that private economic activity drives economic growth.) I'm in the other camp. Obviously, both can't be right; and if one is right, the other is wrong.
I've long thought that if this debate could just be fairly engaged, it would be an easy victory for the side of low government spending and low taxes. Just compare Argentina and Venezuela to Singapore and Switzerland! Or, ask why the United States and Canada got rich while Latin America did not. Or, why high rates of post-war economic growth in Europe got gradually choked off to near zero as government spending rose toward 50% of the economy.
But today, the side that should be advocating for low spending and low taxes has instead been hijacked into advocacy of an economic program of trade protectionism and immigration restriction. At least as to protectionism, that could easily be as counterproductive as raising spending and taxes, at least within limits. Immigration restriction is more debatable -- such restriction would very likely lessen economic growth, but may have positive effects for workers in the lower half of the income distribution, which is not an insignificant point. But meanwhile, we're completely losing track of by far the most important point, which is that by allowing government spending and taxes to continue to grow, we are placing a huge dead weight on our economic performance and making all Americans poorer.
Perhaps you have been reading Krugman or others of his ilk, and think he might be right that more government spending and higher taxes are a good thing for an economy. If so, I have created the first Manhattan Contrarian Economic Policy Quiz, which I urge you to take. There is only one question. Here it is:
The government has decided to build a new bridge across the Mississippi River. It solicits bids. Three contractors submit bids. The bids are: (1) $1 billion; (2) $1.1 billion; and (3) $1.2 billion. Which of the following is the correct approach for dealing with these bids?
A. Accept the bid for $1 billion. It is the low bid. The government and the taxpayers will save money. Everybody in the country (other than the people who build the bridge) will be best off by acceptance of the low bid.
B. Accept the bid for $1.2 billion. It is the high bid. The economy will be improved because an extra $200 million will be "injected" into the economy. As the recipients spend the money, the extra $200 million will be distributed around the economy, either because this high bidding company is paying workers more, or hiring more workers, or maybe making more profit. Under standard GDP accounting principles, the extra $200 million will be recorded dollar-for-dollar as an increase in GDP. The economy will be bigger!
C. Go back to the high bidder and point out that, while a $1.2 billion bid is good, it would be even better if the bid could be doubled to $2.4 billion. That way they can pay all the workers twice as much, or reduce their necessary work hours, or some combination of the two. GDP will be increased by a full $1.4 billion over where it would be if you accept the low bid.
D. Why stop at $2.4 billion? Insist on paying at least $10 billion for the bridge. On second thought, make that $20 billion. There will be plenty of money to pass around to the contractor and the unions for the laborers, who will then gratefully contribute generously to your re-election campaign. All of the additional spending will be dutifully recorded by the government accountants as a dollar-for-dollar increase in GDP. Now you will really notice the jolt!
And now you understand the basics of government "stimulus" spending and Krugmanomics. You might think that with the enormous thumb-on-the-scale stemming from counting government spending at one hundred cents in GDP, it would be possible for the government to completely mask and hide the obvious detriment to economic performance from wasteful spending. Venezuela actually accomplished that feat for many years, until its economy more recently started to collapse, even as measured by the government's numbers. But blowout spending and its companion, over-regulation, take their inevitable toll. So in the United States, President Obama on entering office immediate raised government spending from about $3 trillion per year to about $4 trillion (aka, "the stimulus"); and from there it has never really gone back down meaningfully. The result: CNS reports here that the U.S. just had a record 10 straight years without achieving 3% economic growth in any year. OK, other things have played a role -- ridiculous and pointless over-regulation of the financial sector (Dodd-Frank); the EPA's war on the electric power industry and intentional efforts to drive up the price of electricity; Obamacare; exploding handouts for things like food stamps and SSI; etc. But again, none of this is getting any attention in the current campaign.