The Times is pretty explicit in their claims -
"Hardly a day goes by when either government analysts or the macroeconomists and financial forecasters who advise investors and businesses do not report on the latest signs of economic growth — in housing, consumer spending, business investment. And then they add that things would be better but for the fiscal policy out of Washington. Tax increases and especially spending cuts, these critics say, take money from an economy that still needs some stimulus now, and is getting it only through the expansionary monetary policy of the Federal Reserve." And they've got some pretty impressive support from all those economists in DC (whose livelihood depends on supporting government) and from folks on Wall Street like Moody's (that did such a great job in analyzing collateralized debt obligations and other fairy tales.
So let's review the logic of this claim. The issue is whether increases in government spending actually improve answers for economic growth.
The question is if you take money from Peter to pay Paul or to build shovel ready projects or to increase the number of government employees or to loan it to dubious projects like Solyndra whether you get a multiplier effect - $1 becomes $2 as it flows through the economy.
|An Alternative View by John Taylor based on policies which |
would reduce the size of government spending - i.e. what the
Times does not like.
But there is another part of the equation and that relates to increasing taxes. The recent tax increase(s) also have an effect on the economy. Every wage earner had a 2% decrease in take home when the silly FICA reduction was not renewed. At the same time, with the logic of redistribution, the highest income taxpayers are paying a bit more. Most of the multipliers on tax revenue are negative - some significantly so. So for example some estimates suggest that increasing some taxes will reduce growth by as much as 5:1 - that is a bit extreme but most economists suggest at least some negative effects from increasing taxes. One could also make the case that deficit spending is just a future version of a tax increase and thereby has directionality close to those for tax increases (under you can pay me now or pay me later theory).
There is one other odd thing about this story. Although none of the supporters of the position express it directly, they seem to be saying that dollars at the margin are more important. If it was a good idea to improve tax equity (the claim made by the Obama administration in supporting the tax increases) but not to reduce spending - then one must conclude that that tiny percent of GDP is determinative on the direction of economic growth. With all due respect, that sounds like just plain silly.