Tag Archives: Scott Sumner

Has the Sequester Hurt the Economy?

Several weeks ago, Steve Forbes argued that the federal government spending cuts known as the “sequester” are actually having beneficial effects on the US economy, and not slowing growth as many economists and pundits in the media have claimed. Forbes’s statement attracted critics, and many economists have expressed skepticism about the sequester too. One economist even went so far as to say, “The disjunction between textbook economics and the choices being made in Washington is larger than any I’ve seen in my lifetime.”

So have the sequester cuts hurt the economy? One possible answer comes from a new paper by Scott Sumner of Bentley University. Sumner argues that cuts to government spending don’t have serious deleterious macroeconomic effects when the Federal Reserve is targeting inflation. This is because the Fed ensures that prices stay stable under an inflation targeting regime, which keeps demand stable even in the face of government spending cuts. Similarly, when the Fed stabilizes the price level it also offsets any beneficial effects that fiscal stimulus might have, which helps explain the lackluster results from the 2009 American Recovery and Reinvestment Act (aka the “stimulus”).

Implicit in Sumner’s theory is that expansionary austerity, or the idea that the economy can grow even in the face of large government spending cuts, is indeed possible. Some of my colleagues at the Mercatus Center have described other ways in which expansionary austerity is possible.

Luckily, there are still things Congress can do to improve the economic outlook, even as spending cuts take hold. Lawmakers can enact policies that boost the performance of the real economy. By this I mean policies that increase the amount of real goods and services the economy produces, as opposed to policies that affect demand (i.e. spending).

One example is reforming the regulatory system, which discourages production of all sorts. With over 174,000 pages of federal regulations in place, there must be a few obsolete or duplicative rules that can be eliminated to relieve the burden on businesses and entrepreneurs. Congress could also reform the tax code, with its perverse incentives and countless carve outs for special interests.

Starting new government programs isn’t likely to do much to benefit growth. New projects take too long to implement, politicians waste too much money on silly boondoggles, and monetary policy will likely offset any beneficial effects anyway. If Congress wants to do something to improve growth, it should focus on creating a regulatory and tax environment that encourages investment and entrepreneurial risk taking.

If Obamacare is Repealed, Maybe We Should Replace it With George McGovern’s Plan?

The editorial board in today’s Wall Street Journal eulogizes George McGovern. At the end, they point to a 1992 OpEd that McGovern wrote for the journal. It talks about the regulatory burdens he encountered after he gave up the trappings of public office to become an inn-keeper:

My own business perspective has been limited to that small hotel and restaurant in Stratford, Conn., with an especially difficult lease and a severe recession. But my business associates and I also lived with federal, state and local rules that were all passed with the objective of helping employees, protecting the environment, raising tax dollars for schools, protecting our customers from fire hazards, etc. While I never have doubted the worthiness of any of these goals, the concept that most often eludes legislators is: “Can we make consumers pay the higher prices for the increased operating costs that accompany public regulation and government reporting requirements with reams of red tape.” It is a simple concern that is nonetheless often ignored by legislators.

Scott Sumner also linked to it. But as Nick Gillespie points out in a must-read piece for Bloomberg, McGovern had another—in my view, far more libertarian—piece in the Journal in 2008. Arnold Kling picked up on it at the time. Here is McGovern in 2008:

 There’s no question, however, that delinquency and default rates are far too high. But some of this is due to bad investment decisions by real-estate speculators. These losses are not unlike the risks taken every day in the stock market.

…Health-care paternalism creates another problem that’s rarely mentioned: Many people can’t afford the gold-plated health plans that are the only options available in their states.

Buying health insurance on the Internet and across state lines, where less expensive plans may be available, is prohibited by many state insurance commissions. Despite being able to buy car or home insurance with a mouse click, some state governments require their approved plans for purchase or none at all. It’s as if states dictated that you had to buy a Mercedes or no car at all.

…Economic paternalism takes its newest form with the campaign against short-term small loans, commonly known as “payday lending.”

…Anguished at the fact that payday lending isn’t perfect, some people would outlaw the service entirely, or cap fees at such low levels that no lender will provide the service. Anyone who’s familiar with the law of unintended consequences should be able to guess what happens next.

Researchers from the Federal Reserve Bank of New York went one step further and laid the data out: Payday lending bans simply push low-income borrowers into less pleasant options, including increased rates of bankruptcy. Net result: After a lending ban, the consumer has the same amount of debt but fewer ways to manage it.