Small Business Resource

Just in case you were wondering how our elected officials come up with really bad policy ideas – like believing that massive government spending projects are good for the economy – just read the January 7 New York Times business story written by Louis Uchitelle titled “Economists Warm to Government Spending but Debate Its Form.”

These misguided policy ideas are either conjured up by or affirmed by many of my fellow economists.

Based on a meeting of the American Economic Association, Uchitelle wrote the following:

• Frightened by the recession and the credit crisis that produced it, the nation’s mainstream economists are embracing public spending to repair the damage — even those who have long resisted a significant government role in a market system.

• At their last annual meeting, ideas about using public spending as a way to get out of a recession or about government taking a role to enhance a market system were relegated to progressives. The mainstream was skeptical or downright hostile to such suggestions. This time, virtually everyone voiced their support, returning to a way of thinking that had gone out of fashion in the 1970s.

• The few sessions that dealt with fiscal policy were packed with economists, mostly from academia. Nearly all argued that public spending can be more effective than tax cuts in getting out of a bad recession.

Of course, many of these economists might not be as “mainstream” as Uchitelle insists.

In the end, though, economists should know better. But apparently many do not. Government spending merely drains resources from the private sector – whether through taxing or borrowing – to be used for political purposes and projects. That’s not good for the economy. The private sector is not spurred by this, but instead, is crowded out by government. The economy is bound to suffer in the short run from an extended recession and under-performing recovery, and over the long haul from restrained or sluggish growth under this kind of fiscal policy regime.

It must be kept in mind that government’s massive intrusion into the private sector – through bailouts, bad housing and monetary policies, and assorted misguided regulatory initiatives – got us into this mess.

The right kind of tax and regulatory changes – reducing tax rates and regulatory burdens to boost incentives for private investing and entrepreneurship – along with a rollback in the size of government are the policies our economy desperately needs.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council