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To get to economic truth, delete ideology

Two competing economic theories have had the president and Congress in gridlock for the past several years. Having survived the "fiscal cliff," we now endure automatic across-the-board spending cuts, commonly labeled the "sequester." • It is time that these warring factions distinguish between economic principles and economic ideology so that they can differentiate between what is indisputable and what is not. • Not in dispute are three accounting principles that economists rely on: (1) a person's income depends on the spending of others; (2) national income is equal to the sum of all the spending done to produce goods and services within a country in a given period of time; and (3) national spending is composed of four categories: consumer, business, government and trade. (The trade component is simply the difference between what we spend on imports and what other countries pay for our exports.)

These are not in dispute because they are accounting principles, not ideological positions. They do, however, require some amplification.

While income must always equal spending, that equality can occur at various levels of economic activity. For example, consider two possible levels of national spending, $15 trillion and $16 trillion. National income will equal national spending in both cases, but unemployment will be higher at $15 trillion because fewer workers are required to produce at that level.

Moreover, these spending categories affect one another; they are not independent. For example, when consumers reduce their spending, businesses tend to reduce their spending as well. This is natural: A reduction in sales expectations causes businesses to become bearish right along with their customers.

In today's anemic recovery, total spending is not sufficient to achieve full employment. Consumer and business spending are down, particularly in housing and construction, suppressing the level of our national income.

Those who favor austerity advocate a reduction in government spending to mimic the spending reductions of the consumers and businesses. But note accounting principle (3) above: If consumer and business spending are down, a reduction in government spending would only further reduce our national income, risking an austerity-induced double-dip recession.

To boost national income under current economic conditions, the policy should be to increase government spending to offset the inadequate levels of consumer and business spending to bring total spending up to a full employment level. Instead of sequester, this principle supports greater spending until a robust recovery is achieved.

To offset this addition to the national debt, it is critical that the spending of that borrowed money be on investment in long-lived capital projects. Such investment spending would serve "double-duty," first, by putting people to work today building infrastructure assets (such as roads, bridges, Internet broadband and school buildings) and, second, by improving the productivity of future workers who get to use these assets. As the word "investment" implies, spending now on long-lived productive assets enables the future economy to be more robust and more globally competitive.

It is not indebtedness or lack of it that makes us competitive, but the productivity of the economy. Accordingly, in his letters to FDR, the great economist J.M. Keynes advocated spending not only to put people to work but also to enhance long-run growth by focusing on long-lived capital assets such as the Hoover Dam, expansion of the Lincoln Highway system, rural electrification and the construction of roads and bridges for auto and truck traffic.

By the actions of past Republican presidents, we can discern remarkable agreement with this strategy; to fight recession President Ronald Reagan greatly expanded the deficit, as did both Presidents Bush. Now we are on the verge of doing the opposite.

As if to give us a preview of the outcome of the sequester, the jobs and income reports just released show that the dramatic cut in defense spending in November and December caused the economy to shrink after nearly three years of steady growth. Moreover, in a speech on Feb. 11, the vice chair of the Federal Reserve, Janet Yellen, noted that what is common to all post-World War II recoveries but this one: vigorous support of the economy by expanding government spending. It works, and all decisionmakers know it.

William L. Holahan, far left, is emeritus professor of economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, also recently retired from USF. They are co-authors of "Economics for Voters." They wrote this exclusively for the Tampa Bay Times.

To get to economic truth, delete ideology 03/03/13 [Last modified: Friday, March 1, 2013 4:33pm]
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