MICHAEL BOSKIN:: Larger Spending Cuts Would Help the Economy – WSJ

By at March 5, 2013 | 12:50 am | Print

MICHAEL BOSKIN:: Larger Spending Cuts Would Help the Economy – WSJ


President Obama’s most recent prescription for economic growth—more government stimulus spending, new social programs, higher taxes on upper-income earners, subsidies for some industries and increased regulation for all of them—is likely to have the same anemic results as in his first administration.

Recall: The $825 billion stimulus program did little economic good at a cost of hundreds of thousands of dollars per job, even based on the administration’s own inflated job estimates. Cash for Clunkers cost $3 billion merely to shift car sales forward a few months. The PPIP (Public-Private Investment Program for Legacy Assets) to buy toxic assets from the banks to speed lending generated just 3% of the $1 trillion that the program planners anticipated.

And now? Mr. Obama proposes universal preschool ($25 billion per year), “Fix it First” repairs to roads and bridges, plus an infrastructure bank ($50 billion), “Project Rebuild,” refurbishing private properties in cities ($15 billion), endless green-energy subsidies, and a big hike in the minimum wage. The president and Senate Democrats also demand that half the spending cuts under sequestration be replaced with higher taxes.

These proposals are ill-considered. The evidence sadly suggests the initial improvement in children’s cognitive skills from “Head Start” quickly evaporates. Higher minimum wages increase unemployment among low-skilled workers. A dozen recent studies in peer-reviewed journals, including one by the president’s former chief economic adviser Christina Romer, document the negative effects of higher taxes on the economy.

As for adventures in industrial policy, former Obama economic adviser Larry Summers wrote a memo in 2009 about the impending $527 million loan guarantee to Solyndra and other recipients of government largess. “The government is a crappy v.c. [venture capitalist],” he wrote, in what is also the best postmortem. In 2010, Harvard economist Edward Glaeser concluded in the New York Times that infrastructure is poor stimulus because “It is impossible to spend quickly and wisely.” Federal infrastructure spending should be dealt with in regular appropriations.

Will more spending today stimulate the economy? Standard Keynesian models that claim a quick boost from higher government spending show the effect quickly turns negative. So the spending needs to be repeated over and over, like a drug, to keep this hypothetical positive effect going. Japan tried that to little effect, starting in the 1990s. It now has the highest debt-to-GDP ratio among the countries of the Organization for Economic Cooperation and Development—and that debt is a prime cause, as well as effect, of Japan’s enduring stagnation.

via Michael Boskin: Larger Spending Cuts Would Help the Economy – WSJ.com.