Sorry, I couldn’t resist. That’s the title of another missive by Alan Blinder in a recent Wall Street Journal issue.
He begins with this Keynesian fiction:
In the short run—let’s say within a year or so—a larger deficit…boosts economic growth by increasing aggregate demand. It’s pretty simple. If the government spends more money without raising anyone’s taxes to pay the bills, that adds to total demand directly.
Umm, well, no, it doesn’t. That increased government spending (accepting, arguendo, no associated increase in taxes) only comes at the expense of future taxes or current borrowing—which is more future taxes. People aren’t as dumb as Keynes thought they were, or as Blinder thinks they are. In the present case, Americans see this trap, and they reduce spending (and investing) today in favor of saving and/or paying down their own current debt, thus offsetting that spike (again assuming, arguendo, that a government actually can reduce spending after its spike up).
Moreover, that government spending crowds out a significant fraction of remaining private spending. After all, why should we buy something that the government is going to buy and give to us?
On top of this, Swedish economists Andreas Bergh and Magnus Henrekson have a 2011 piece (login required; sorry), that surely Blinder has read, in the Journal of Economic Surveys that shows the deleterious effects of increases in government spending. They conclude that a 10% increase in government size (relative to GDP) is associated with a 0.5%-1.0% lower annual growth rate in the economy. This is no spike, but then governments don’t spike spending.
It really is pretty simple. Just not as oversimplified as Blinder suggests, and not in the same direction.
In short, money that folks, and businesses, are paying in higher taxes is money that folks, and businesses, no longer have available for current spending. Or investing, or saving.
It is true, though, that spending is increased relative to taxes. But the only result of this “increase” is in the deleterious effects of deficit spending.
On this matter, Romer and Romer have a 2010 piece (login required here, too; sorry), that surely Blinder also has read, in American Economic Review, that shows the powerful effect of increasing tax rates on economic growth: an increase in taxes of 1% of GDP lowers GDP by nearly 3%.
Blinder has more in his piece, but with his underlying assumptions shown to be false, the rest has no more value than that. For instance, he writes in all seriousness
But don’t we need to reduce the deficit—and by large amounts? Yes, we do, but that’s in the long run, where the effects of larger deficits are mostly harmful to economic growth.
Of course, as Blinder’s own Keynes noted so long ago, in the long run, we’re all dead. More empirically, over the long run, governments do not unroll spending increases that they’ve foisted off on us for that good cause of the time. As long as Blinder is satisfied that our present enormous debt can be safely reduced in that far-off fantastical long run, he’s satisfied that our present enormous debt never will be reduced.
Update: Deleted a section where I’d simply–and carelessly–misread Blinder’s statement, and so my argument became irrelevant.