Saturday, July 13, 2013

Budget Cutting and Reducing Government Works

History has more than a few examples where government expenditures were drastically reduced but the private economy boomed.  For instance, government spending dropped drastically in the US after World War II and after the Korean war.  US Government spending fell from about 50% of GDP to 11% of GDP after WWII.  There was a recession, but the 50's are remembered as a golden era for the US economy with strong growth, low inflation and low interest rates.

It's also interesting that the US is now seeing a rebounding economy even after the Sequester cuts; which most economists and most other people (Keynesians), including our Socialist-lite President Obama, said would trigger "disaster."  I've seen descriptions by competent commentators that sequester cuts, along with the increase in payroll taxes, are the deepest austerity in 50 years. Scary right?  Well, the economy is not tanking as predicted. In fact, it appears to be going the other way.

Now, in part because of the improving economic news (and panic over emerging asset bubbles), the Federal Reserve has signaled that they are going to exit their government bond buying program. This is good news. Don't be surprised to see a continued and even stronger economy in light of these "withdrawals" of the government from the economy.  Less government and higher economic freedom mean higher prosperity (ever been to Singapore?)  Now if we only had a moratorium on further regulation from the likes of the NLRB and EPA and a repeal of ObamaCare, the economy would be even stronger.

A Romney win would have sent an even stronger message of government retreat from the absurd level of activism that we've seen since the government-induced crash of 2008. I've mentioned in other blogs that we were seeing a similar level of government intervention into the economy as in the late 70s (remember Carter?).  It didn't work in the 1970s either. But apparently about half of the nation can't remember history: Democrats.

Austerity on the Government Helps (Budget Cuts).  Austerity (Taxes) on the People Hurts

Listening to Democrats and Paul Krugman, their biggest cheerleader, austerity is a "dirty word."  He wants even bigger deficits and even more wasteful spending!  But, they are all wrong.

Here are some other examples from Daniel Mitchell at RealClearPolitics (with some quotes from Alan Reynolds at RealClearPolitics and IBD) to show that austerity on the government sector helps the private economy.
In Iceland, which did not throw taxpayer money at the banks, government spending was slashed from 57.6% of GDP in 2008 to 46.5% in 2012. The deficit fell from 12.9% of GDP to 3.4%. The economy began to recover in 2011. Iceland’s economic boost from fiscal frugality was neither unorthodox nor unique. After all, the U.S. economy boomed in the late 1990s when federal spending was cut from 22.3% of GDP in 1991 to 18.2% in 2000 [in modern times, government spending never actually declines but, instead, GDP boomed]. In Canada, total federal and provincial spending was deeply slashed from 53.2% of GDP in 1992 to 39.2% in 2007 with only salubrious effects.
 Compare the tax raisers to tax reducers (from the same article):
It is enlightening to compare the depressing performance of these tax-and-spend countries to the rapidly-expanding BRIC (Brazil, Russia, India and China) and MIST economies (Mexico, Indonesia, South Korea and Turkey). Government spending is frugal in these countries, averaging 32.1% of GDP in the BRICs and 27.4% for the MIST group. Rather than raising top tax rates, all but one of the BRIC and MIST countries slashed their highest individual income tax rates in half; sometimes lower. Brazil cut the top tax rate from 55 to 27.5%. Russia replaced income tax rates up to 60% with a 13% flat tax. India cut the top tax rate to 30% from 60%. Similarly, the top tax rate was cut from 55 to 30% in Mexico, from 50 to 30% in Indonesia, from 89 to 38% in South Korea, and from 75 to 35% in Turkey.

Baltic Countries Had Real GOVERNMENT Austerity and are Back to Growth

Latvia, Lithuania and Estonia imposed real government spending cuts and are recovering nicely now. Estonia's president Toomas Hendrik Ilves recently rebuffed Paul Krugman in HuffPost and said this about government spending cuts are there:
Ilves, a strong austerity advocate, told Bloomberg News in May that the EU should implement austerity in order to boost economic expansion. “You can achieve growth through austerity. Estonia has done that.”
Other quotes from that article:
Estonia, which in 2011 became the latest country to join the Eurozone, has been heralded by some as an austerity success story. That year, it clocked a faster economic growth pace than any other country in the European Union, at 7.6 percent. Estonia is also the only EU member with a budget surplus, and had the lowest public debt in 2011 -- 6 percent of GDP. Fitch affirmed its A+ credit rating last week.
All of this is a direct intellectual assault on the limits of Keynesianism and those that follow that ideology.  If it worked, how come Japan never had a good economy after 20 years and nearly 20 stimulus programs?   It hasn't worked well here either--- 6 Trillion dollars of deficit spending and 3 Trillion of "money printing" hasn't worked after trying that for 5 years now.  The New Deal didn't really work either.

It will be extremely instructive if we continue to see an improved economy after imposing a modicum of austerity on our government.  But Keynesians rule the entire world at the moment and are missing the points of this blog post. And those ideologues are determined to never learn anything!

No comments: