Tuesday, January 7, 2014

Summers vs Taylor -- Who's Right

Larry Summers and John Taylor, both academic economists, recently duked it out at the annual meetings of the American Economics Association.  What was the fight about?

Why is this recovery so feeble?

Summers took the crude Keynesian view, espoused on a napkin by Keynes' student Richard Kahn in 1926.  Larger deficits!  According to this view, inadequate consumer demand is the problem.  Increasing government deficit spending is the answer.  Somehow, Summers is of the opinion that this has not been tried yet, even though the accumulated deficits since 2008 are the largest in any five year period in American history.  Wonder what level of deficits would fit the Summers recovery plan?

Taylor took a microeconomic point of view:  the increased burden of taxes and regulation have strangled the economy's normal tendency to snap back quickly from a recession.  Dodd-Frank, EPA, Obamacare, etc., etc. represent the largest bureaucratic expansion in American history.  The year-end tax deal at the end of 2011 represented the single largest personal income tax increase in American history.  Do you really need to look for much else?

Meanwhile, the Administration plans to morph "emergency" unemployment benefits into the status of a permanent entitlement for millions of Americans.  If that wasn't enough to keep people off job rolls, try increasing the minimum wage by 40 percent, prohibiting the poorest and least skilled Americans from any hope of achieving the skillset necessary for a modern economy.

No point in elaborating on the damage that the implementation of Obamacare is doing to the economy.  Suffice it to say that unless reversed, American health care will soon resemble our worst public schools and for the same set of reasons -- too much government.

Meanwhile, back to Professor Summers:  again, what level of government spending and deficit spending would suffice for the modern "macroeconomist?"  Does Summers think that quantitative easing didn't go far enough?  In Summers worldview, entrepreneurs and incentives are irrelevant.  What matters is what Richard Kahn scribbled out hurriedly on a napkin in 1926.  That's pretty much the worldview of Janet Yellen as well.

In a world where economists think that raising the price of something increases the demand for it (think minimum wage), I guess anything is possible.


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