In Bloomberg, Amity Shlaes challenges Paul Krugman on fiscal austerity.
A reader comments:
Amity Schlaes pens an austerity-can-lead-to-growth op-ed, dismissing Paul Krugman's call for more Keynesian spending, but commits a startling error:
...There is evidence that austerity did lead to growth in the past, and that it did not cause fascism. These examples may be less known, but they suggest that austerity can bring recovery faster than spending can.Brian Domitrovic has written how there was virtual consensus between Presidents Wilson's and Harding's money men on reducing top marginal rates before the election, so how could Shlaes forget Mellon’s tax cutting agenda that kicked off the Roaring Twenties? The Revenue Act of 1921 brought the top marginal tax rate down to 58% in 1922 from 73%, and with subsequent reductions, Mellon was able to get that top tax rate down to 25% by 1925. The austerity of the 1920s did not take place without efforts to foster economic growth. In this, Shlaes was sloppy.
A strong example in U.S. history is the recession of the early 1920s. Responding to a downturn, the federal government didn't spend; it cut itself in half. Recovery followed so rapidly few people even remember that recession.
On NRO, Larry Kudlow reports Senate Minority Leader Mitch McConnell (KY) pushing for the Keystone Pipeline in exchange for the payroll tax cut.
On The Kudlow Report, Steve Forbes discusses National Review’s editorial opposing Newt Gingrich:
From Forbes, Louis Woodhill argues pro-growth policies explain Gingrich’s rise.
At The American, James Pethokoukis suggests Gingrich’s Iowa lead is softening.
In The American Spectator, Ben Stein predicts President Gingrich and Vice President Huntsman.
At The WSJ, Dan Henninger portrays Gingrich as Mitt Romney’s sparring partner, toughening the former governor up to debate President Obama.
On NRO, Elise Jordan sees Jon Huntsman failing to capitalize on recent opportunities.
At Forbes, Jerry Bowyer highlights the role of interest rates to functional economic and financial systems.
From First Trust, Brian Wesbury predicts unemployment will be down to 8% by Election Day.
On The WSJ, Steve Cortes argues the Chinese economic model won’t work in the long run:
In The WSJ, conservative Keynesian Martin Feldstein pans the Eurozone economic deal.
On C-SPAN, PIIE’s C. Fred Bergsten – Keynesian and key intellectual driver of the 1970s dollar devaluation and subsequent Great Inflation – argues more American jobs will come from rebalancing world trade by lowering the dollar’s exchange rate to a competitive level (around minute 13).
Sean
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No, Schlaes was not sloppy. The Federal budget of 1919 was spending about 60% borrowed dollars. The 1920 spending was reduced by about 60% with a surplus of 0.6%. The 1921 spending was reduced about another 20%, the surplus at 0.7%. and 1922 spending went down about another 30% This is austerity.
The Keynesians would say this austerity was the cause of the sharp recession, ignoring that spending 60 cents borrowed out of each dollar is unsustainable. Without the austerity, the large tax rate decreases would not have happened.
Just a few dates for further information. The recession ended July, 1921, the tax reduction bill did not pass until November 1921. As always, unemployment lagged.
I am not denying the importance of tax rate reductions that lead to the booming 1920's. But it is somewhat apples and oranges. The recession ended during the austerity phase. Later rapid growth was the result of lower income tax rates.
But austerity came first. And more importantly, the Federal budget returned to a small percent of GDP.