–Prof. Barro and the cost of federal spending

An alternative to popular faith

The 1/22/10 Wall Street Journal published an opinion piece by Professor Robert Barro (Harvard University), who believes, “Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates — especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant. On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis. Just as in the 1980s, when extreme supply-side views on tax cuts were unjustified, it is wrong now to think that added government spending is free.”

Mostly, I agree — with one huge exception. That last phrase, ” . . . it is wrong now to think that added government spending is free” is itself, wrong.

If federal government spending is not free, it must have a cost. So what is the cost? Not higher taxes, which have no historical relationship to deficit spending. (See item #9 at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/.)
Taxes generally have been based on political, not economic, considerations. From a financial standpoint, taxes no longer (after 1971, the end of the gold standard) affect the federal government’s ability to spend. In fact, all federal taxes could be eliminated tomorrow, and the federal government’s ability to spend would not be reduced by even one penny.

Is the cost of federal government spending increased inflation. No, not that either. There is no historical relationship between federal deficits and inflation. The highest inflation since WWII came with the modest Carter deficits, and was cured during the robust Reagan spending years. A graph of deficit growth vs. inflation shows a zero cause/effect relationship. (See item #8 in https://rodgermmitchell.wordpress.com/2009/09/07/introduction/ )

Well then, does deficit spending cause high interest rates? The graph at https://rodgermmitchell.wordpress.com/2009/11/15/deficits-and-interest-rates-another-myth/ indicates no relationship between high deficits and high interest rates.

Even if deficit spending did cause interest rates to rise, there is no historical relationship between low rates and high GDP growth. See item #10 at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/

In summary, there is no post-1971 cost to federal deficit spending, a strong argument for tax cuts and increased spending and a strong argument against deficit concerns.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

3 thoughts on “–Prof. Barro and the cost of federal spending

  1. The cost of federal spending is one of opportunity cost, that is the value of any alternatives that the money could have been spent on. Federal money may appear out of thin air, but the production that it stimulates represents the real labor and resources of the American economy. These resources could be used for other things.

    Do you have any formal economics training at all? Opportunity cost is such a basic, fundamental concept of economics and you blithely ignore it in all of your “ideas”.

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  2. Do you feel America has so maximized the use of its resources that additional federal spending will take away from “other things”?

    Last I heard, there were 15 – 17 million unemployed in America, and that’s probably conservative, because it doesn’t include others who could, but don’t work for various reasons.

    Re. training, yes at Illinois and Northwestern, then subsequently in dialogs with noted economics professors, particularly the Chartalists, with whom I tend to agree, though not completely. (We differ mostly on the cure for inflation.)

    How about you?

    Rodger Malcolm Mitchell

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