Friday, July 15, 2011

Slashing and Cutting Your Way to Prosperity

What a strange thought. If you chop jobs and cut budgets and remove programs and tell everybody to "tighten your belts", you believe that suddenly the economy will blossom.

How could that possibly work? How can adding to the unemployed create new jobs or convince employers they should pay their workers more?

How could slashing spending, cutting plans, and forcing everybody to do more with less suddenly result in more jobs, more wages, and bigger spending?

That is the fantasy of Barak Obama. Here is a bit from the Economist magazine:
TO LISTEN to Barack Obama, there is no trade-off between supporting a weak economy and tackling America’s strained public finances. “We have to cut the spending we can’t afford so we can put the economy on sounder footing,” the president said on July 2nd. Big spending cuts are necessary, he added, to “give our businesses the confidence they need to grow and create jobs”. Perhaps.... [P]ublic-sector job losses helped drive the unemployment rate up to 9.2% in June, which didn’t obviously do a lot for confidence.

Mr Obama is not alone in arguing that austerity can boost growth: Britain’s deficit-slashing coalition government and the European Central Bank (ECB) also make the case.... In practice, however, it rarely works out that way. In a recent study of 173 fiscal-policy changes in rich countries from 1978 to 2009, economists from the IMF found that cutting a country’s budget deficit by 1% of GDP typically reduces real output by about two-thirds of a percentage point and raises the unemployment rate by one-third of a percentage point.
Go read the whole article.

Obviously Obama knows no economics. Worse, he apparently refuses to listen any on staff and instead solicits "economics" advice from political buddies. But that is like consulting the butcher about the need for heart surgery or asking the teller at the bank for investment advice. Nutty!

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