Two-faced spending policy

Many others have made this point with regard to economic policy analysis, calling out pundits and economists alike who continue to get away with taking contradictory stances on the appropriate course of economic policy. So let’s clear a couple of things up.

It begins with a simple question: do you believe that taxes and the level of government spending impact economic activity? I do, and certainly most economists and political pundits would agree. But this means that you must believe in this impact regardless of the direction of the impact! That is, if you believe increasing government spending would impact the economy (typically we assume this is a positive impact), then you should also believe that decreasing government spending would (negatively) impact the economy.

Seems simple enough. If a policy has an impact, then it has an impact – independent of the degree of good or bad it generates as a consequence. Simple enough, of course, until a group of economists comes along to 1) decry the notion of fiscal stimulus as being able to aid in the economic recovery (suggesting they denounce the idea that government spending on goods and services can in fact impact the economy) and then 2) express outrage at the impending threat of the “fiscal cliff” from which large cuts in government spending would supposedly have a tremendous negative impact on the economy! So government spending can’t help but can only hurt? Positive spending is meaningless, but negative spending is catastrophic? This kind of thinking is sadly inconsistent. [I’ll try not to jump to the conclusion that these individuals’ goals are philosophically aimed to reduce the size of government, but it is a notion difficult to resist.]

In other words, you can’t be Keynesian just sometimes, or just when it is convenient. Every time I hear a politician simultaneously campaign on “Government spending isn’t the answer to creating jobs!” and “If we close down this facility which produces ships for the Navy, we will be losing jobs!”, I cringe. It is precisely because the government is buying those ships that workers at the facility have jobs! Too often, our discourse is in black and white (Government good! Government bad!), when in reality, there are far more shades of grey. Even if you philosophically don’t want to accept that the government can create jobs, it’s tough to deny that they do. Unless, of course, you are speaking to a teachers’ union or federal military contractors. Then the hypocrisy flows all too easily.

Hat tips: Brad DeLong and PK.


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