Thursday, August 25, 2011

Are Obama's deficits helping the economy?

Pres. Obama and the Democrats claim that deficit spending "stimulates" the economy. This is the Keynesian school of economics. Writing in the Wall Street Journal, Dr. Robert J. Barro, Professor of Economics at Harvard, explains the problems with this theory:

[I]n true Keynesian spirit, Agriculture Secretary Tom Vilsack said recently that food stamps were an "economic stimulus" and that "every dollar of benefits generates $1.84 in the economy in terms of economic activity." Many observers may see how this idea—that one can magically get back more than one puts in—conflicts with what I will call "regular economics." What few know is that there is no meaningful theoretical or empirical support for the Keynesian position.

The overall prediction from regular economics is that an expansion of transfers, such as food stamps, decreases employment and, hence, gross domestic product (GDP). In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.

In addition, the financing of a transfer program requires more taxes—today or in the future in the case of deficit financing. These added levies likely further reduce work effort—in this instance by taxpayers expected to finance the transfer—and also lower investment because the return after taxes is diminished.

In short, deficit spending, such as on welfare, distorts incentives, reducing both work and investment. So much for theory. What does the empirical evidence say? Prof. Barro continues:

Theorizing aside, Keynesian policy conclusions, such as the wisdom of additional stimulus geared to money transfers, should come down to empirical evidence. And there is zero evidence that deficit-financed transfers raise GDP and employment—not to mention evidence for a multiplier of two. [Emph. added]

Hat tip: JustOneMinute.

PREVIOUSLY on Obamanomics:
Survey of CEOs: Obamanomics is still the problem
A CEO explains how Obama's policies damage the economy
CEO: businesses are "frightened to death" of Obamacare and Obama's regulatory overreach
Obamanomics and the prolonged recession
How to lie with statistics
3M: “Politicians forget that business has choice"
Obamacare: Corporatism in action
Obama 0, Germany 1:
Medical insurance prices rising due to ObamaCare
Laws of Economics 1; Obama 0
Why Liberal economics fails: redistribution does not create wealth (Illustrated)
Obamacare endangers student health
Why business isn't hiring
Dodd-Frank finance "reform" bill stops bond market cold
Why unemployment insurance must be extended (illustrated)
Obamanomics still failing, Washington Post discovers
Russia goes supply-side
Study: Liberals are economically illiterate

No comments:

Clicky Web Analytics