Peter Ferrara is a graduate of Harvard Law School and
holds various positions including Senior Advisor for Entitlement Reform and
Budget Policy at the National Tax Limitation Foundation and Senior Fellow at
the National Center for Policy Analysis. He served in the Reagan administration
and the first Bush administration. He’s
also clueless.
In a recent column a Forbes dot com http://tinyurl.com/cwt7kay
Ferrara sets out to debunk what he believes are fiscal policy myths. Some of the myths Ferrara claims to debunk
were never really myths in the first place. Maybe Nancy Pelosi passed some of
them on to her constituents in a lame attempt to smear an opponent. It is true
that both parties have a few Todd Akins and Louie Gohmerts who are clueless,
classless and beyond correction and hold some wacky beliefs, but for the most
part, the so-called myths debunked [sic] by Ferrara are hardly widely embraced.
One such myth is the notion that Keynesian policy
includes a belief that increased government spending stimulates the economy
during recession. This is not true.
Keynesian theory does not hold that Government spending stimulates the
economy, but fiscal policy can and does stabilize the economy.
The Obama stimulus [sic] is a good example of this. It
stopped a freefalling economy. It prevented a lot of people from losing their
jobs. Did it stimulate economic growth? No way. Take a look at the
cash-for-clunkers program. During the program, sales of new cars jumped
noticeably, but when it ended sales of new cars tanked again. The program had
an undeniable effect. However, it didn’t stimulate any economic growth.
Another myth propagated by Ferrara is the blatantly
ignorant belief that the money supply is fixed. Ferrara nails this one: “If the
government spends more, where does the money for that increased spending come
from? Either from increased borrowing, or increased taxes, which both take an
equal amount of resources and spending out of the private economy as they
finance in increased government spending.” This is ridiculous. The Fed can and
does create money out of thin air. Everyone knows this except those that fell
asleep during Intro to Monetary Policy class.
[There is the threat of inflation when the Fed does this.
However, the Fed’s actions only increase the monetary base. In a recessionary
deflationary economy, that doesn’t lead to inflation. There is a risk of
inflation in the future, but that can be easily addressed when the time comes.]
Here’s another one: “Demand can never be inadequate in a
market economy. If the demand for any product or service is not strong enough,
the price of the good or service will fall, until demand equals supply.” The
actual statement is theoretically true (except for the Jessica Simpson
Christmas CD a few years ago – they couldn’t lower the price enough to sell
them so they ended up shit-canning tens of thousands of dollars of product),
but Ferrara uses it to argue that a shift in aggregate demand does not affect
economic growth.
In fact, in 2007 the aggregate demand curve began a long
migration to the left, and it is this low aggregate demand that is the primary
reason the economy isn’t growing. People are too indebted with underwater
mortgages, student debt and consumer debt. This reduced the quantity of goods
and services they can purchase at any given price level thereby affecting the
quantity of goods and services supplied. I mean come on. Why produce more cars,
houses or other products when consumers can’t or won’t purchase them? This is actually a widely held belief among
supply-siders and appears in a 2004 book written by Stephen Moore and Arthur
Laffer.
And another: “The people can never spend more than they
produce…” This is stupid because the U.S. has been spending more than they
produce for nearly the past 3 decades. We’ve gone from the world’s largest
creditor nation to the world’s largest debtor nation using mortgage debt,
credit card debt and other borrowings to finance the appearance of prosperity.
As I mentioned earlier, the major factor holding back the economy is the
overwhelming consumer debt.
Ferrara continues (he’s on a roll, baby): “And they will
never spend less than they produce, leaving demand inadequate, for they will
either consume or save every dime that they earn or produce. The consumption
goes into consumer spending, and the savings goes into capital spending.” The
fact is that not all savings goes into capital spending especially right now.
Banks and businesses are sitting on assets. The reason they’re sitting on cash
and not investing was already mentioned above. With consumers so deeply in debt
from spending more than they produced for so long, investment in new production
is not expected to reap a high return.
One thing that Ferrara does get right is this: “Another
myth is that raising tax rates will not harm the economy”. But this is another
one of those things that everyone really does agree with. Raising taxes can
have a significant adverse effect on the economy. In dispute is the degree of
the effect. Reducing a marginal tax rate from 70% or to 28% has a significant
effect. When people raise the argument that raising a tax rate from 35% to 39%
might not have such a dramatic effect on the economy, they have a valid point.
