An Experiment in Austerity
By BRUCE BARTLETT
Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.
One reason that economics is not a true science is that economists can’t really perform experiments in which certain details are altered to see if they change the results and in what way. Of course, small experiments can be done using student volunteers playing economic games, but we can’t rerun the 1980s without the Reagan tax cut, which was signed into law 30 years ago this Saturday, and see if we would have gotten slower growth. Economists do their best to simulate alternative scenarios, but it’s not the same thing as rerunning the same history under different sets of policies.
But once in a while economists get to observe a natural experiment where policy is changed in a way that allows a theory to be tested by real-world results. We are about to run just such an experiment by tightening fiscal policy and cutting spending significantly below baseline projections at a time when the economy is weak. As I pointed out in a July 12 post, we performed this experiment once before, in 1937. The budget deficit was sharply reduced and a recession immediately followed.
Since the beginning of our recent economic woes, there has been a theoretical debate among economists about the proper governmental response. I think it is reasonable to say that most supported the idea of fiscal stimulus in principle, although there certainly were different opinions about the size and structure of the February 2009 Recovery Act. But there were also conservative economists arguing that the stimulus was a bad idea for the same reasons they urged Franklin D. Roosevelt to balance the budget in 1937. Funds that the government borrows would be better invested by the private sector, they said.
(More here.)
Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.
One reason that economics is not a true science is that economists can’t really perform experiments in which certain details are altered to see if they change the results and in what way. Of course, small experiments can be done using student volunteers playing economic games, but we can’t rerun the 1980s without the Reagan tax cut, which was signed into law 30 years ago this Saturday, and see if we would have gotten slower growth. Economists do their best to simulate alternative scenarios, but it’s not the same thing as rerunning the same history under different sets of policies.
But once in a while economists get to observe a natural experiment where policy is changed in a way that allows a theory to be tested by real-world results. We are about to run just such an experiment by tightening fiscal policy and cutting spending significantly below baseline projections at a time when the economy is weak. As I pointed out in a July 12 post, we performed this experiment once before, in 1937. The budget deficit was sharply reduced and a recession immediately followed.
Since the beginning of our recent economic woes, there has been a theoretical debate among economists about the proper governmental response. I think it is reasonable to say that most supported the idea of fiscal stimulus in principle, although there certainly were different opinions about the size and structure of the February 2009 Recovery Act. But there were also conservative economists arguing that the stimulus was a bad idea for the same reasons they urged Franklin D. Roosevelt to balance the budget in 1937. Funds that the government borrows would be better invested by the private sector, they said.
(More here.)
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