How bad does Edward Lazear need it to be?

Writing in Friday’s Wall Street Journal, Stanford professor Edward Lazear argues that the real danger to the American worker is too much government–in other words: too many taxes and too much spending.

Prof. Lazear writes:

During the debt-ceiling debate, President Obama characterized his push for higher taxes and less aggressive budget cuts as being helpful to the middle class. The claim was that failing to raise taxes on high-income earners would place a disproportionate share of the pain on the rest. But it is our record-high government spending, not the failure to raise taxes on the rich, that is the typical American’s largest long-term problem.

In fact, virtually every government policy that has an impact on the deficit will have winners and losers.  The President’s point was merely that by cutting the budget deficit though spending cuts along, instead of a combination of spending cuts and tax increases on people with higher incomes, the burden will fall primarily on lower and middle class citizens.

He continues:

Our current problems are not a result of acts of nature. They stem from policy choices that dramatically increased the size of the government.

Well, he is partially right.  Our current problems stem from a financial crisis that resulted from excessively expansionary monetary and fiscal policies adopted during the regimes of Fed Chairman Alan Greenspan and President George W. Bush.  Since Prof. Lazear was chairman of President Bush’s Council of Economic Advisors during 2006-2009, I wonder what sort of fiscal policy advice he was giving.

Prof. Lazear further argues that the fiscal stimulus added at most 3 percent to GDP, so that it has fallen fell by 9 percent–rather than 12 percent–since the crisis erupted.  Even if you believe those numbers (and accept his assertion that a 1 percent fall in of GDP translates into 0.6 percent increase of unemployment), this means that in the absence of the stimulus, the unemployment rate would be hovering around 11 percent instead 9.1 percent.  Since the post-Great Depression peak in unemployment was 10.8 percent (recorded in December 1982), this would have been a  bigger deal than Prof. Lazear is prepared to acknowledge.

The notion that a GDP decline of “only” 12 percent was not worth doing something about because that was less than the decline experienced during the Great Depression is flawed on a couple of counts.  First, had the crisis involved an additional 3 percentage point drop in GDP (i.e., had it been 33 percent more severe), it could well have led to a further financial and economic meltdown.  Second, given the lag with which economic data appears, by not acting at the time, we could easily have found ourselves in depression before we took decisive action.  Of course, by then we could have been in an economic free-fall, making any fiscal stimulus less effective.

Finally, Lazear’s entire opinion piece is framed in terms of “the long run.”  Two years–not even a complete business cycle–really doesn’t qualify as the long run in any economics textbook.  For long-run fiscal irresponsibility, you need only look back at George W. Bush’s presidency, which included  seven consecutive years of increases in the debt-to-GDP ratio: from about 56 percent in 2001 to about 70 percent when he left office.  And President Bush  had a choice: he faced no financial meltdown, but still somehow managed to wreck the fiscal rectitude that had been so painstakingly achieved during the Clinton Administration.

The Obama stimulus–which now appears to have been too small–was made necessary by his predecessor’s recklessness.

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