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October 3, 2011

Listening to Long-Dead Economists

It is a bit too early to tell what this recession and recovery will do to the reputation of the many economists who prognosticated through it.  One thing is for certain, this recession has provided much publicity for many long-dead economists. So it seems, in a perverse way, that current economic policy debate is framed by theorists who were active in, say, 1938.  There are even mock debates with actors portraying these decaying economists. While I am all for the proper glorification of economists on stage and screen (George Clooney as Mike Hicks seems like a great role), I am sad that so much of the most relevant and fruitful economic research is now ignored.

A bit of background helps. John Maynard Keynes famously argued that the surest way out of the Great Depression was big government spending, in what became FDR’s New Deal.  His name continues to be synonymous with the intervention of government in a market economy.  Among his critics were Ludwig Von Mises and Friedrich Hayek, whose native Austria became the name for those who argued for minimal government influence in the economy (the Austrian School). Both the work of Keynes and the Austrians continue to be critical to current research.  Elements of both views play out clearly in today’s economy.  Here’s how.     

Job creation in the United States is substantially slowed by the contraction of state and local government.  The economic reality of our times compels most state and local governments to shrink payrolls and contract spending on goods and services.  This is mostly warranted, and this great de-leveraging of government debt in state and local budgets is needed—but that does not mean that the stoppage of spending that is run amok will not reduce economic activity in the short run.  The evidence that this is happening is unmistakable. The fact that Indiana was able to cut spending while also reducing tax collections spared us a much more painful recession.

Deleveraging at the federal level will also slow the economy in the short run, but it has not yet begun to do so.  This is contrary to my advice, no doubt because they are actually listening to George Clooney and not me. 

The short run of the economy is mostly about spending—both government and consumers—and so faces a daunting few years even as consumer spending has rebounded. Again, this is simple Keynesian economics, but it is not the only effect on the economy and cannot explain our current slump.

Over the long run, higher government expenditures tend to dampen economic growth.  Typically, this is modestly painful and can be (on rare occasion) offset by wise government investment, but that cannot explain what is happening now. Far more likely today is that a realization by a wary public made up of businesses and households that the huge debt is an unmistakable sign of a future with harsh and relentless taxation.  So today, they do not invest, waiting to see what transpires. This observation comes from living economists, who still have a reputation to be made.

Link to this commentary: https://commentaries.cberdata.org/590/listening-to-long-dead-economists

Tags: economy


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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