Profs offer economic remedy
The Cato Institute, a Washington, D.C.-based think tank, circulated a petition against the American Recovery and Reinvestment Act as an advertisement in the New York Times and the Washington Post on Jan. 29.
Among the nation’s 203 economists who signed the petition were UH economics professors Paul Gregory, Roy Ruffin and Thomas Mayor.
The petition stated ‘with all due respect Mr. President, that is not true. Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance.’
‘More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s ‘lost decade’ in the 1990s.
‘To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.’
Republican senators used the petition Jan. 29 to show not all economists agreed on the stimulus plan.
Despite universities such as UH being eligible to receive significant research funding from the stimulus plan, Gregory said justification for the bill is nearsighted.
‘This is the fundamental problem of public finance, that it’s based in narrow interest,’ Gregory said. ‘Even though entities such as UH may benefit in the short run, in the long run, it may not be beneficial if it does long-term harm to the economy.’
Gregory said the stimulus plan shifts too much economic power to the government sector.
‘Private institutions are more productive than the government,’ he said. ‘Increased government spending tends to replace private spending.’
UH economics professor Tom DeGregori disagrees.
‘Look where the private sector has gotten us. They put us at the economic crisis that we are in,’ DeGregori said.
During the Great Depression, the Glass-Steagall Act was approved to separate investment banking from common commercial banking.
The Glass-Steagall Act was repealed in November 1999, allowing for the formation of banking giants such as Citigroup, which collapsed in November and received a $45 billion bailout.
‘Rampant, unregulated capitalism with no oversight is self-destructive.’ And I think that it has been evident,’ DeGregori said. ‘Other than regulation, the government needs to take an active part in revitalizing the economy, and with this kind of spending, it creates jobs to get us out of the economy that was created by the private sector because of the lack of oversight.’
Georgory said governments can’t spend their way out of recessions.
‘Its too difficult to time government spending,’ Gregory said. ‘(Japan) had a similar banking crisis that went on for 10 years, and the action the government took did not alleviate the crisis.
‘In the Japanese case, the government tried to spend its way out of the crisis rather than focus on the crisis of the banking system. It accumulated a huge national debt, but the spending did not get the economy going.’
Though the stimulus efforts in Japan were flawed, they were not a complete failure, said Hugh Patrick, Columbia University business professor and director of the Center on Japanese Economy and Business.’
‘A lot of people point out that the Japanese government’s action did not work, but it did,’ Patrick said. ‘The various stimulus efforts by the Japanese government were too ad hoc, too little and too late. But by the mid 1990s, things were working and in fact, by 1996, it was doing so well that Japanese Prime Minister Hashimoto Ryutaro decided to cut government expenditure. It shifted from stimulus to fiscal consolidation. And that was also a mistake. The GDP dropped by 2 percent that year.’
The long-term effectiveness of the stimulus spending is a point of concern, Gregory said.’
‘We authorize spending now, who knows what will happen in two to four years? This is the problem of being unable to time government spending properly,’ he said.
Patrick agrees timing is a critical factory in the effectiveness of government stimulus, but unlike the Japanese, the U.S. did not delay its spending, he said.
‘The difference between the Japanese financial crisis in the 90s versus the U.S. now is time lag,’ Patrick said. ‘It took Japan years to respond to the seriousness of the difficulties, while it took US just months.’
Gregory said economic solutions that avoided government intervention would have been more the prudent approach.’
‘My policy would have been to let the Federal Reserve do its job and keep politics out of it. Introducing politics into this creates serious problems that affects negatively,’ he said. ‘The way Congress passes a bill that confiscates the AIG bonuses is most likely unconstitutional. Congress cannot change the rules of the game after the fact; that is unconstitutional.’
Despite the risk of compromising the Constitution, the government had to take action against the economic downturn, UH political science lecturer Van Wigginton said.
‘Yes, what Congress did with AIG bonuses may be unconstitutional, but from a political standpoint, something has to be done at least until public confidence is restored,’ Wigginton said.
Far from petitioning against the stimulus plan, Dietrich Vollrath, UH assistant economics professor, said it’s cause for celebration.
‘The stimulus plan is great,’ said Vollrath, who, despite having thrown a party to celebrate the signing of the recovery plan, also said it could have been improved.’ ‘While some of the items in the plan would have immediate results, there are some long-term projects in there that may not have the same immediate effect, and it may take say at least two years. And right now, I think we need more shovel ready projects.’
UH economics professor Roy Ruffin also signed the petition opposing the plan.’
Ruffin said his decision to sign was a simple act of textbook conservatism.’
‘The stimulus plan is all rhetoric,’ Ruffin said. ‘More government spending is not going to pull us out of the current economy. We should cut spending instead.’
The Cato Institute’s petition can be viewed at http://www.cato.org/special/stimulus09/alternate_version.html.