Modern Budget Cutting Hooverians Want a Return to the 1930's

[Donnachaidh]

http://neweconomicperspectives.blogspot.com/2011/04/modern-budget-cutting-hooverians-want.html

In a Wall Street Journal article this week three Hoover Institute economists (Gary Becker, George Schultz and John Taylor) endorsed Republican efforts to make large federal government budget cuts. I will not address all the arguments made in defense of a “Hooverian” approach to economics (we tried that in the early 1930s!). Here I want to focus on the two main points made:

1. “When private investment is high, unemployment is low. In 2006, investment—business fixed investment plus residential investment—as a share of GDP was high, at 17%, and unemployment was low, at 5%. By 2010 private investment as a share of GDP was down to 12%, and unemployment was up to more than 9%. In the year 2000, investment as a share of GDP was 17% while unemployment averaged around 4%. This is a regular pattern.”
2. “In contrast, higher government spending is not associated with lower unemployment. For example, when government purchases of goods and services came down as a share of GDP in the 1990s, unemployment didn't rise. In fact it fell, and the higher level of government purchases as a share of GDP since 2000 has clearly not been associated with lower unemployment.”


The authors supply a graph showing investment and government spending as a share of GDP to demonstrate these two points. Based on that data, these economists argue that the solution is to cut federal spending and then to hold its growth rate below that of GDP. This will allow the share of government spending to fall—while economic growth will let tax revenues rise a bit faster so that the budget will move toward balance.


More at the link --

[Sherman A1]

1. I think it's more like the 1890's, but

that's just my opinion.