Archive for the 'Fiscal Policy' Category

The Macroeconomics of Food Stamps

November 2, 2013

by Mario Rizzo

The expansion of food stamp eligibility in response to the Great Recession was part of the so-called stimulus package. There were several aspects. First, there was a simple increase in the maximum amount allowed to beneficiaries of about 14%. There was also a tremendous drive to get people who are eligible, but did not get food stamps, to apply and get them. Then there was a loosening of eligibility requirements in some states. Finally, there was the increase in unemployment resulting from the recession and thus an increase in the number of eligible people.

In 2007 the number of people on food stamps was 26 million. Today it is about 48 million! But look more closely at the data (in thousands):













The reader should note that, even as unemployment has declined, the number of food-stamp recipients has increased. Based on decades long trends we should have observed a significant decrease in the number of recipients. Read the rest of this entry »

Lawrence Klein: Keynesian Economist Who Wanted to Sidestep the Constitution

October 24, 2013

By Richard M. Ebeling

Nobel Prizing-winning Keynesian economist, Lawrence Klein died on October 20, 2013, at the age of 93. A long-time professor of economics at the University of Pennsylvania, he was awarded the Nobel Prize in 1980 for his development of econometric (or statistical) models of the United States “macro” economy for purposes of prediction and “activist” government policy making.


He also was a senior economic advisor to Jimmy Carter during his successful run for the presidency in 1976, but Klein declined a position in the Carter Administration for fear of the negative publicity from his membership in the American Communist Party in the 1930s. 


What is less well known today is that immediately after World War II he was one of the great popularizers of the “new economics” of John Maynard Keynes, especially in his widely read book, The Keynesian Revolution, published in 1947.


Keynes’ Conception of Government as Savior

In The General Theory of Employment, Interest, and Money (1936) Keynes had argued that the market economy was inherently unstable and susceptible to wide and unpredictable swings in output, employment, and prices. Worse yet, he asserted, the market could get stuck in a prolonged period of high unemployment and idle resources. Only judicious government monetary and fiscal policy could assure a return to sustainable full employment. Read the rest of this entry »

The Euro: a Step Toward the Gold Standard?

April 22, 2013

by Andreas Hoffmann (University of Leipzig)

In a recent piece Jesus Huerta de Soto (2012) argues that the euro is a proxy for the gold standard. He draws several analogies between the euro and the classical gold standard (1880-1912). Like when “going on gold” European governments gave up monetary sovereignty by introducing the euro. Like the classical gold standard the common currency forces reforms upon countries that are in crisis because governments cannot manipulate the exchange rate and inflate away debt. Therefore, to limit state power and to encourage e.g. labor market reforms he views the euro as second best to the gold standard from a free market perspective. Therefore, we should defend it. He finds that it is a step toward the re-establishment of the classical gold standard.

There has been much criticism of the piece that mainly addresses the inflationary bias of the ECB. I actually agree with much of it. In particular, imperfect currency areas have the potential to restrict monetary nationalism. This can be welcomed just as customs unions that allow for free trade (at least in restricted areas). But I have some trouble with De Soto’s conclusions and the view that adhering to the euro (as did adhering to gold) gives an extra impetus for market reform – in spite of the mentioned e.g. labor market reforms in Spain. Read the rest of this entry »

In Favor of Across-the-Board Cuts in Government Spending

January 3, 2013

by Mario Rizzo

I am not sure which is worse: superstitions based on science or superstitions pure and simple.

Many people would react to across the board cuts in government spending by saying something like: “This is crazy; some things are more important than others. We should cut the less important things first.” And, indeed, economists would seem to agree. After all, the equi-marginal principle was one of the first “discoveries” of the marginal revolution. No sense cutting programs in such a way that some will have very high returns, however measured, at the margin while others will have very low returns. Irrational!

However, what is rational for a household or an individual need not be rational policy for the government. Why is that? Read the rest of this entry »

Raise Middle Class Taxes Now!

December 26, 2012

by Mario Rizzo

I now favor expiration of the Bush era tax rates for everyone.  Why? Because the only way to curb spending in the long run is to make as large a number of Americans as possible truly feel the consequences of the expenditures they appear to desire.

If Americans saw the cost of the gigantic welfare state in their paychecks, they would, I am confident, radically re-evaluate the expenditure side of the situation we are in. Then when someone comes up with a genius idea for spending, the people would think: Is it worth higher taxes? Might I not spend it better on my family, my church – or even – on… champagne? Read the rest of this entry »

Government Revenues from Low-Interest Rate Policies

December 19, 2012

by Andreas Hoffmann and Holger Zemanek*

Over the last two years Carmen Reinhart and Belen Sbrancia have published a series of papers on financial repression and its historical role in financing government debt. They show that throughout the Bretton Woods period governments in many advanced economies repressed financial markets to liquidate the high levels of debt that had been accumulated by the end of World War II.

During this period, low policy rates reduced debt servicing costs. Financial repression raised the attractiveness of government bonds relative to other investments. Inflation liquidated government debt. The authors report an annual debt liquidation effect for, e.g., the US and UK government debt of about 3 – 4 percent of GDP (Reinhart and Sbrancia 2011).

Today government debt levels in many countries are comparable to those after the Second World War II! After all, good politicians do not need a World War. There are plenty of other ways to spend. But in the light of the European debt crisis, governments are feeling the need to correct the spending-revenue misalignments in order to make debt-service sustainable. Read the rest of this entry »

After the Fiscal Imbalance is Resolved: What Then?

December 15, 2012

by Mario Rizzo

Let us suppose that not only the immediate fiscal cliff problem is solved but also the long-run fiscal imbalance is corrected. What then? Presumably federal spending will then be on a sustainable trajectory which is able to cope with cost-of-living increases. Ordinary trend economic growth will already have been figured into the sustainability of the spending trajectory.

So what room is there for more spending without derailing the whole “solution?”  Consider that the contemporary federal government – executive and legislature – exists for the purpose of giving favors to various groups in exchange for electoral support.  Thus, even assuming the unlikely event that the long-term imbalance is resolved, how do we stay within the solution range?  After all, we did not get where we are by accident.

Only a real change in the philosophy (ideology) of government will work. The pragmatic solutions of those who do not challenge the welfare-warfare state, root and branch, are not enough. They are not “pragmatic” enough!

Interests are More Powerful than Ideas?

December 9, 2012


by Mario Rizzo

There is an interesting interview with Ed Feulner, the outgoing president of the Heritage Foundation, in the weekend (Dec. 8-9) Wall Street Journal. The interview got me thinking about the progress made in the pro-economic-liberty cause, not only over the years of Heritage, but since, say, 1960. Read the rest of this entry »

Fiscal Cliff: Sense and Nonsense

November 9, 2012

by Mario Rizzo

The above table is from the November 8th issue of the Wall Street Journal. The figures for the fiscal cliff consequences are usefully stated for next year and not for the next nine years as those who want to suggest that the numbers are truly impressive (or want to scare children) typically use.

Consider the following facts or likely scenarios: Read the rest of this entry »

Uncertainty and the Keynesians

July 20, 2012

by Chidem Kurdas

At the current economic juncture two camps offer diametrically opposed macro policy prescriptions. Economists on the Keynesian side such as Joseph Stiglitz and Paul Krugman advocate further monetary easing by the Federal Reserve and massive new federal deficit spending. The opposing camp includes Austrians and monetarists. Among its distinguished members is Allan Meltzer, who in a recent Wall Street Journal op-ed column argues against monetary stimulus and favors reduced government spending.

These correspond to two ways of understanding the sluggishness of the US economy,  explanations based on different time horizons Read the rest of this entry »


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