Saturday, September 4, 2010
In an article entitled “Why America Isn’t Working” Kenneth Rogoff displays his ignorance yet again. He gives three reasons for thinking that tax cuts won’t boost the economy.
First, he claims that stimulus involves more debt. Well, as Milton Friedman (and Keynes) explained, one can boost economies WITHOUT extra debt (AND without dropping interest rates). For Milton Friedman’s explanation see http://www.jstor.org/pss/1810624
Second, Rogoff claims that households will save a significant portion of tax cuts, well OF COURSE THEY WILL!!! Households are DELEVERAGING, as everyone, including the average mentally retarded six year old knows by now. When households have been fed enough money via tax cuts and feel comfortable with their levels of leverage, they’ll start spending again. Presumably Rogoff would advocate not pouring water on a house fire on the grounds that the first ten gallons won’t have much effect.
Of course that is not to say simple straightforward stimulus is a panacea. That is, the credit crunch occurred because of risky and fraudulent bank and mortgage practices. That needs rectifying. And the excessive number of former construction industry employees need re-allocating and re-training. But former construction industry employees form only a small portion of the unemployment total in the U.S. (unlike Spain). So construction industry unemployment is not much of an excuse for near record levels of unemployment in the U.S.