The Government Is the Problem
By Randall Holcombe • Tuesday November 15, 2011 2:06 PM PDT • 2 Comments
Ronald Reagan said “Government is not the solution to our problems, government is the problem.” Nowhere does this appear more true than with the state of the global economy today. My fellow blogger Robert Higgs has repeatedly emphasized the government creation of regime uncertainty that keeps unemployment high and investment low, because businesses are reluctant to hire and invest when uncertain government policies can make those decisions more costly in the future. Even more directly, the world-wide economic instability caused by the budgetary excesses in Greece, Italy, and other Eurozone countries hinders global recovery. Meanwhile, the unsustainable deficits in the United States have become so obvious that even people in Congress are aware of them! The Congressional Deficit Reduction Super Committee will make its report to Congress on November 23... if they can reach an agreement.
President Reagan made the general observation that government is the problem, but more specifically on the subject above, government is creating economic instability, not reducing it. Meanwhile, the conventional economic wisdom, both among many professional economists and among politicians, is that government should intervene more to stabilize the economy. Christina Romer says the Federal Reserve has not been aggressive enough in their stimulus efforts, and numerous commentators, led by Paul Krugman, say we need more stimulus spending.
Yes, there are economists who argue differently. I’m one of them. It appears to me that those who are arguing for more government intervention are saying “This didn’t work before, so let’s try more of it.” There are reasons these interventions haven’t worked. The more government takes out of the economy, the less will be left for private sector production. The more uncertainty government produces, the less businesses are willing to hire and invest.
Government stimulus efforts, which have thus far shown no evidence that they work, are meanwhile burdening us with budget deficits in excess of a trillion dollars a year, and a national debt approaching $15 trillion. That is a lot to pay for something that doesn’t work.
I am disappointed in my profession — the economics profession — for not seeing more clearly that government is not stabilizing the economy, it is creating instability. This points to fundamental problems in mainstream methodology. Economists tend to depict citizens as mathematical functions who react to situations in a predictable and repeatable way, and government as an omniscient benevolent dictator that knows the optimal course of action, and follows it. Once these unrealistic assumptions are stripped away, the idea that the government is a stabilizing force on the economy vanishes with them.
Tags: Bailouts, Budget and Tax Policy, Economics, Politics, Uncategorized 
The Obama Team claims that the stimulus “saved or created” 3.3 million jobs. How do they know? I can reveal their method, as presented by Christina Romer, recently resigned head of the President’s Council of Economic Advisors.
Consider this analogy to the idiotic logic of our government economists.
Say that records from my backyard grill parties show that on average, 20 guests eat 25 hamburgers and 5 hot dogs. I would like to be much more popular, so I double the food to 50 hamburgers and 10 hot dogs for my next party. I expect 40 people to show up without calling more friends.
After a few more parties, I find that 23 people (three more) do show up. Maybe they came because they heard about the huge amount of food. I resolve to supply even more food (stimulus) for my next parties.
Government economists are treating the entire population of the US in the same way that my example treats grill parties. You may say that I am unfairly criticizing government economists. They couldn’t be that simplistic and stupid. But, that is exactly the method they used to recommend “stimulus” and estimate new jobs.
–> Romer is Theoretically Correct
The President’s Council Of Economic Advisers in May 2009 [edited]:
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To estimate the likely impact of the fiscal stimulus on real GDP, we used multipliers that we feel represent a consensus of a broad range of economists and professional forecasters.
The final step is to take the effect on GDP and translate it into job creation. Not all of the increased output reflects increased employment: some comes from increases in hours of work among employed workers and some comes from higher productivity.
We therefore use the relatively conservative rule of thumb that a 1 percent increase in GDP corresponds to an increase in employment of approximately 1 million jobs, or about three-quarters of a percent. This has been the rough correspondence over history and matches the Federal Reserve Bank model reasonably well.
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1: Measure the number of jobs in the economy at different levels of GDP. Notice the ratio 1MM jobs per 1% of GDP.
2: Spend money. Each dollar spent adds to GDP by definition.
3: Welcome the newly employed people to the economy.
This is idiocy. This is mere formula crunching. First, express the complexity of the US economy as a simple ratio. Then, play with the ratio by manipulating an accounting measure (the definition of GDP).
Of course, they do get to distribute a huge amount of money to their friends along the way. So, it isn’t all bad, for them.
Andrew_M_Garland | Nov 16, 2011 | Reply
It’s a bit like the anaology I once read from C.S. Lewis. He wrote about an Irishman who bought a wood stove in order to save money on his utlity bills. It seemd to work. He found that his bills were cut in half. He then concluded that if he bought another wood stove he would never have to pay another utility bill during his lifetime.
Phil Dillon | Nov 16, 2011 | Reply