Wintery Knight

…integrating Christian faith and knowledge in the public square

11/21/2012 • 10:00 AM 0

Harvard economist explains why spending cuts are better than tax increases

From Investors Business Daily, an editorial by Dr. Alberto Alesina of Harvard University, that explains which approach to reducing debt and deficits works best. Is it cutting spending and reducing regulation? Or is it continuing to borrow and spend, and raising taxes?

Let’s see what Dr. Alesina says:

The evidence speaks loud and clear: When governments reduce deficits by raising taxes, they are indeed likely to witness deep, prolonged recessions. But when governments attack deficits by cutting spending, the results are very different.

In 2011, the International Monetary Fund identified episodes from 1980 to 2005 in which 17 developed countries had aggressively reduced deficits. The IMF classified each episode as either “expenditure-based” or “tax-based,” depending on whether the government had mainly cut spending or hiked taxes.

When Carlo Favero, Francesco Giavazzi and I studied the results, it turned out that the two kinds of deficit reduction had starkly different effects: cutting spending resulted in very small, short-lived — if any — recessions, and raising taxes resulted in prolonged recessions.

[...]The obvious economic challenge to our contention is: What keeps an economy from slumping when government spending, a major component of aggregate demand, goes down? That is, if the economy doesn’t enter recession, some other component of aggregate demand must necessarily be rising to make up for the reduced government spending — and what is it? The answer: private investment.

Our research found that private-sector capital accumulation rose after the spending-cut deficit reductions, with firms investing more in productive activities — for example, buying machinery and opening new plants. After the tax-hike deficit reductions, capital accumulation dropped.

The reason may involve business confidence, which, we found, plummeted during the tax-based adjustments and rose (or at least didn’t fall) during the expenditure-based ones. When governments cut spending, they may signal that tax rates won’t have to rise in the future, thus spurring investors (and possibly consumers) to be more active.

Our findings on business confidence are consistent with the broader argument that American firms, though profitable, aren’t investing or hiring as much as they might right now because they’re uncertain about future fiscal policy, taxation and regulation.

But there’s a second reason that private investment rises when governments cut spending: the cuts are often just part of a larger reform package that includes other pro-growth measures.

In another study, Silvia Ardagna and I showed that the deficit reductions that successfully lower debt-to-GDP ratios without sparking recessions are those that combine spending reductions with such measures as deregulation, the liberalization of labor markets (including, in some cases, explicit agreement with unions for more moderate wages) and tax reforms that increase labor participation.

Let’s be clear: This body of evidence doesn’t mean that cutting government spending always leads to economic booms. Rather, it shows that spending cuts are much less costly for the economy than tax hikes and that a carefully designed deficit-reduction plan, based on spending cuts and pro-growth policies, may completely eliminate the output loss that you’d expect from such cuts. Tax-based deficit reduction, by contrast, is always recessionary.

UPDATE: George Mason University economists agree: debt is wrecking the economy and the right way to stop it is with spending cuts, not tax increases. In order to grow the economy we need a balanced approach of spending cuts and tax cuts.

Excerpt:

The United States’ high levels of debt are already contributing to slower economic growth and decreased competitiveness. These impacts will worsen if the nation’s debt-to-GDP levels continue to rise, as is currently projected.

[...]High levels of government debt undermine U.S. competitiveness in several ways, including crowding out private investment, raising costs to private businesses, and contributing to both real and perceived macroeconomic instability.

[...]Carmen Reinhart and Kenneth Rogoff examine historical data from 40 countries over 200 years and find that when a nation’s gross national debt exceeds 90% of GDP, real growth was cut by one percent in mild cases and by half in the most extreme cases. This result was found in both developing and advanced economies.

Similarly, a Bank for International Settlements study finds that when government debt in OECD countries exceeds about 85% of GDP, economic growth slows.

[...]While fundamental tax reform is required to correct a host of structural inefficiencies, policymakers can quickly reduce the U.S. statutory rate of 35% to the OECD average rate of 26% or less.

That’s what research tells us. But that’s not what we are doing, because we voted for Barack Obama.

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03/15/2012 • 10:00 PM 0

Santorum campaign relies on donated buses and door-to-door campaigning

From socially liberal Business Week.

Excerpt:

With minimal campaign organization and less funds than his rivals, Santorum has boosted his campaign with the votes of a network of evangelical Christians, anti-abortion rights activists and home-schooling parents who are resisting frontrunner Mitt Romney. In a March 8-11 national Bloomberg Poll, likely voters who described themselves as “born again” or evangelical Christian backed Santorum by 42 percent compared with 28 percent for Romney.

“Romney’s inability to close out the race has given Santorum a golden opportunity to unite social conservatives behind him, and they are getting in line,” said Keith Appell, a Republican public relations executive who works with social conservative groups.

Parents who home school their children are spreading the message on Facebook. Southern Baptist pastors are promoting Santorum’s candidacy to their members. Anti-abortion rights advocates are boarding the “Rick Bus” for multi-state voter mobilization tours.

Two days before Tennessee’s primary, Santorum attended services on March 4 at the Bellevue Baptist Church, a 7,000- member organization in the Memphis suburbs.

[...]Santorum won the state’s primary.

Such efforts are helping the former Pennsylvania senator compensate for a campaign operation that trails Romney in every measure of strength: money, staff, and organization.

Romney raised $63 million for his campaign through January, compared with $7 million by Santorum. Santorum had spent $148,806 on salaries and benefits through January; Romney’s personnel costs have exceeded $4.5 million. Santorum recently opened a national campaign headquarters in Virginia; Romney’s offices near Boston Harbor have been open nearly a year.

He’s tapping into well organized yet loosely affiliated groups of activists whose leaders consider Santorum one of them. “Santorum has piggybacked on the top of other existing grassroots networks,” said Cleta Mitchell, his campaign counsel. “They’re basically activating their networks on his behalf.”

[...]Romney and a political action committee supporting him ran 64 percent of the commercials that aired in Mississippi and Alabama in the month before the primaries, compared to just 15 percent aired by Santorum’s backers, according to data from New York-based Kantar Media’s CMAG, which tracks advertising.

The article tries to paint Santorum as a social conservative, and he is. But he also has a solid economic plan, that’s targeted to the middle class, and especially manufacturing. Basically, Romney is burning through millions and millions of dollars to buy the nomination. But ordinary conservatives, especially social conservatives, like Rick Santorum best.

Rick Santorum

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03/06/2012 • 4:00 AM 1

Rick Santorum’s economic plan is good for Ohio and Ohioans

From the Wall Street Journal, a column by Rick Santorum.

Excerpt:

[I]n my first 100 days as president, I’ll submit to Congress and work to pass a comprehensive pro-growth and pro-family Economic Freedom Agenda. Here are 10 of its main initiatives:

  • Unleash America’s energy. I’ll approve the Keystone Pipeline for jobs and energy security, and sign an order on day one unleashing America’s domestic energy production, allowing states to choose where they want to explore for oil and natural gas and to set their own regulations for hydrofracking.
  • Stop job-killing regulation. All Obama administration regulations that have an economic burden over $100 million will be repealed, including the Environmental Protection Agency rule on CO2 emissions that’s already shut down six power plants. I’ll review all regulations, making sure they use sound science and cost benefit analysis.
  • A pro-growth, pro-family tax policy. I’ll submit to Congress comprehensive tax policies to strengthen opportunity in our country, with only two income tax rates of 10% and 28%. To help families, I’ll triple the personal deduction for children and eliminate the marriage tax penalty.
  • Restore America’s competitiveness. The corporate tax rate should be halved, to a flat rate of 17.5%. Corporations should be allowed to expense all business equipment and investment. Taxes on corporate earnings repatriated from overseas should be eliminated to bring home manufacturing. I’ll take the lead on tort reform to lower costs to consumers.
  • Rein in spending. I’ll propose spending cuts of $5 trillion over five years, including cuts for the remainder of fiscal year 2013. I’ll propose budgets that spend less money each year than prior years, and I’ll reduce the nondefense-related federal work force by at least 10%, without replacing them with private contractors.
  • Repeal and replace ObamaCare. I’ll submit legislation to repeal ObamaCare, and on day one issue an executive order ending related regulatory obligations on the states. I’ll work with Congress to replace ObamaCare with competitive insurance choices to improve quality and limit the costs of health care, while protecting those with uninsurable health conditions. In contrast, Gov. Romney signed into law RomneyCare, which provided the model for ObamaCare. Its best-known feature is its overreaching individual health-care mandate. But it shares over a dozen other similarities with ObamaCare and has given Massachusetts the highest health-care premiums in the nation, and longer waits for health care.
  • Balance the budget. I’ll submit to Congress a budget that will balance within four years and call on Congress to pass a balanced-budget amendment to the Constitution which limits federal spending to 18% of GDP.
  • Negotiate and submit free trade agreements. Because many Americans work for companies which export, I’ll initiate negotiations in the first 100 days and submit to Congress five free trade agreements during my first year in office to increase exports.
  • Reform entitlements. I’ll cut means-tested entitlement programs by 10% across the board, freeze them for four years, and block grant them to states—as I did as the author of welfare reform in 1996. I’ll reform Medicare and Social Security so they are fiscally sustainable for seniors and young people.
  • Revive housing. I’ll submit plans to Congress to phase out within several years Fannie Mae and Freddie Mac’s federal housing role, reform and make transparent the Federal Reserve, and allow families whose mortgages are “underwater” to deduct losses from the sale of their home in order to get a fresh start in difficult economic times.

According to the Wall Street Journal, Santorum’s a “supply-sider for the working man“.

Rick Santorum

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02/28/2012 • 4:00 AM 5

What does Rick Santorum’s economic plan do?

From the Wall Street Journal, a column by Rick Santorum.

Excerpt:

[I]n my first 100 days as president, I’ll submit to Congress and work to pass a comprehensive pro-growth and pro-family Economic Freedom Agenda. Here are 10 of its main initiatives:

  • Unleash America’s energy. I’ll approve the Keystone Pipeline for jobs and energy security, and sign an order on day one unleashing America’s domestic energy production, allowing states to choose where they want to explore for oil and natural gas and to set their own regulations for hydrofracking.
  • Stop job-killing regulation. All Obama administration regulations that have an economic burden over $100 million will be repealed, including the Environmental Protection Agency rule on CO2 emissions that’s already shut down six power plants. I’ll review all regulations, making sure they use sound science and cost benefit analysis.
  • A pro-growth, pro-family tax policy. I’ll submit to Congress comprehensive tax policies to strengthen opportunity in our country, with only two income tax rates of 10% and 28%. To help families, I’ll triple the personal deduction for children and eliminate the marriage tax penalty.
  • Restore America’s competitiveness. The corporate tax rate should be halved, to a flat rate of 17.5%. Corporations should be allowed to expense all business equipment and investment. Taxes on corporate earnings repatriated from overseas should be eliminated to bring home manufacturing. I’ll take the lead on tort reform to lower costs to consumers.
  • Rein in spending. I’ll propose spending cuts of $5 trillion over five years, including cuts for the remainder of fiscal year 2013. I’ll propose budgets that spend less money each year than prior years, and I’ll reduce the nondefense-related federal work force by at least 10%, without replacing them with private contractors.
  • Repeal and replace ObamaCare. I’ll submit legislation to repeal ObamaCare, and on day one issue an executive order ending related regulatory obligations on the states. I’ll work with Congress to replace ObamaCare with competitive insurance choices to improve quality and limit the costs of health care, while protecting those with uninsurable health conditions. In contrast, Gov. Romney signed into law RomneyCare, which provided the model for ObamaCare. Its best-known feature is its overreaching individual health-care mandate. But it shares over a dozen other similarities with ObamaCare and has given Massachusetts the highest health-care premiums in the nation, and longer waits for health care.
  • Balance the budget. I’ll submit to Congress a budget that will balance within four years and call on Congress to pass a balanced-budget amendment to the Constitution which limits federal spending to 18% of GDP.
  • Negotiate and submit free trade agreements. Because many Americans work for companies which export, I’ll initiate negotiations in the first 100 days and submit to Congress five free trade agreements during my first year in office to increase exports.
  • Reform entitlements. I’ll cut means-tested entitlement programs by 10% across the board, freeze them for four years, and block grant them to states—as I did as the author of welfare reform in 1996. I’ll reform Medicare and Social Security so they are fiscally sustainable for seniors and young people.
  • Revive housing. I’ll submit plans to Congress to phase out within several years Fannie Mae and Freddie Mac’s federal housing role, reform and make transparent the Federal Reserve, and allow families whose mortgages are “underwater” to deduct losses from the sale of their home in order to get a fresh start in difficult economic times.

According to the Wall Street Journal, Santorum’s a “supply-sider for the working man“.

Rick Santorum

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01/15/2012 • 6:00 PM 2

Wall Street Journal: Rick Santorum is a supply-sider for the working man

Just to refresh everyone, a proponent of supply-side economics is someone who believes that economic growth is driven more by innovation and entrepreneurship, and less by consumer spending and government stimulus spending. Supply-siders are all about creating wealth - by letting creative people have the money invent something valuable that consumers will want to buy – like an iPhone or a Kindle. Demand-siders are all about redistributing wealth - by having the government take from one group of people to give it to another group of people – like a Solyndra loan or a Chevy Volt subsidy.

Here’s the Wall Street Journal article about Rick Santorum, and where he fits on the scale.

Excerpt on his economic plan for businesses:

‘I’m someone who believes that making things creates wealth,” says Rick Santorum. It is primary day in New Hampshire, and the former Pennsylvania senator and current presidential candidate is describing his plan to slash corporate tax rates. To encourage companies to make things, he would completely eliminate the federal income tax on manufacturers. For all other businesses, the rate would be cut in half, to 17.5% from 35%.

[...]I ask if his corporate tax plan opens him up to criticism that he and President Obama are both favoring particular sectors of the economy, with Mr. Santorum picking manufacturing while Mr. Obama anoints green energy. “Oh, green energy is not a sector, I mean, come on. It’s like a half-dozen companies,” says Mr. Santorum.

Does this mean the Obama policy would be more legitimate if the president were favoring a larger group of Solyndras?

“He’s talking about handing out tax-free grants and loans,” says Mr. Santorum, who adds that his own plan “is a conservative approach. It’s supply-side. It’s cutting rates. Why are we cutting the corporate rate to 17.5% and making it simple? . . . Because we think it’s what’s necessary to grow the economy. . . . So if what’s necessary to grow the economy in one sector of the economy is different from another, then why should we have the same tax rate?” He argues that manufacturing has been hit particularly hard by the costs of regulation and litigation.

That’s pro-growth – we’re all going to have multiple job offers if he executes this plan – back to 4% unemployment like under Bush.

But what about his economic plan for taxpayers?

Mr. Santorum also believes that making babies creates wealth. It’s very difficult to grow an economy with a shrinking population, he says, pointing to the “demographic winter in Europe” as a cause of that region’s troubles. To help avoid that fate in the U.S., he wants to triple the per-child tax credit and also cut individual tax rates.

[...]On the personal tax side, rewarding child-rearing is consistent with the pro-life views of Mr. Santorum, who has seven children. But the case he makes seems to echo the analysis of some Wall Street economists, who view population growth as a critical advantage the United States will enjoy over China and the euro zone.

Mr. Santorum argues that the cost of Europe’s massive welfare states made it too expensive for young people to have families. He notes that with plummeting birth rates, many European countries have resorted to “baby bonuses” to try to reverse the tide, but the demographic picture remains bleak, while the costs of entitlement programs have exploded.

“Who are benefits promised to, overwhelmingly? Well, they’re promised to older people. And if you have a society like Europe that is upside down where there are a lot more older people than younger people, you have economic calamity,” he says. Asked if giving generous per-child credits will result in an even larger number of households exempt from the income tax and therefore amenable to more spending, he says his plan will drive growth and that, in turn, will bring more people on to the tax rolls. Elimination of deductions might also keep some people paying income taxes. He aims to balance overall taxes and spending at 18% of GDP. Spending has soared to 24% in the Obama era.

In a still-crowded field of non-Romneys trying to compete for the Republican nomination, Mr. Santorum could emerge in the Jan. 21 South Carolina primary as the man who can bring together the old Reagan coalition. A champion of cultural conservatives with a blue-collar background, he is also making the case for deep cuts in federal spending. His credibility on this last issue derives from the political price he paid for being an early promoter of entitlement reform.

And what about his plan for entitlement reform?

To prevent an economic calamity on this side of the Atlantic, he also proposes to cut $5 trillion from federal spending in five years. He calls the plan advanced by House Budget Chairman Paul Ryan “a good starting point,” but he notes that few of the spending cuts happen in the first decade of the plan. Also, Mr. Santorum says that he wants to reform Social Security, not just Medicare and Medicaid. “I like the Ryan plan on the Medicare side. I don’t like waiting 10 years. I don’t like waiting 10 years on anything. I’ve also talked about Social Security.”

Has he ever, going back at least to the 1990s. Says Mr. Santorum, “Some guy just walked up to me at the [New Hampshire campaign] headquarters with a picture of me standing at the presidential podium in Kansas City, Missouri, in April 1998 when I went with Bill Clinton to talk about Social Security reform. I was the Republican lead on the issue,” he recounts, a dangerous proposition for someone representing Pennsylvania, a state with one of the oldest populations in the country. “And I won re-election after that, I might add.”

But after winning that 2000 election—his second Senate victory and his fourth straight win in Democratic territory—Mr. Santorum aggressively backed President George W. Bush’s call for allowing younger workers to own personal accounts.

It’s much easier to contemplate marriage when you 1) have multiple job offers and 2) you are keeping more of what you earn and 3) children are less of a burden on your income and 4) the government is not going to bankrupt those children with out of control entitlements. Marriage-minded men who want to start families will love this plan. It is a signal to men to start working, start marrying and start having children. Men think about these things, you know – losing our jobs, whether our children will be better off than we were, and so on. Santorum gets it – he has a pro-marriage, pro-family economic plan.

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