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A failed experiment may go national after the November elections

By       Message Seymour Patterson     Permalink
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opednews.com Headlined to H2 10/27/14

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There is little evidence to support arguments that austerity leads to long-term economic growth. On the contrary, there is an abundance of evidence to support the notion that austerity is a counter-growth strategy. However, there is evidence that a deficit-spending fiscal policy is the recommended prescription for growth in a poorly performing economy, since government spending can be shown to exert a positive effect on employment and output. Yet, in some quarters, the budget deficit offers a moral imperative for cuts in government spending.

The jury seems to be in on Governor Brownback's "real life experiment" in Kansas. The experiment has been a massive failure. Nevertheless, to implement his experiment, the governor "eliminated the top income bracket of 6.45 percent, reduced the middle bracket from 6.25 percent to 4.9 percent, reduced the lowest bracket from 3.5 percent to 3 percent, and ended taxes on certain kinds of small-business income. This, he promised, would increase disposable income and create thousands of jobs." (see Slate) What the governor did was in line with Austrian economics thinking that argues, among other things, for spending and tax cuts in difficult economic times. (see Ludwig Van Mises Institute) This is based on the assumption that large budget spending precipitates economic crises.

It is very concerning is that the failed Brownback experiment for Kansas has been attempted in other states: although according to The Wall Street Journal, a similar proposal has been considered in GOP-led states such as Indiana, Louisiana, Nebraska, North Carolina, Ohio and Oklahoma. But while Governor Brownback has a Republican majority in the state senate that allowed him to go through with his experiment, other the GOP-led states that have been alluded to faced some push back from "reluctant legislators and restive electorates." (see New Republic) Senate Minority Leader Mitch McConnell has been quoted as saying, "This is exactly the sort of thing we want to do here, in Washington, but can't, at least for now." (Ibid.) Senator McConnell wishes to foist this experiment on the nation if the Republicans capture the Senate in the November midterm elections. As with these states, the only protection against the eventuality is that the presidency will remain in the hands of a moderate democrat, who will be in a position to veto "real life experiment" bills on his desk.

Some economists seem to want to will austerity to work despite the evidence it does not. Beginning in 2010, the growth in GDP fell from 2.1 percent to 0.07 percent. (The Economist) In a spirit of denial, the British government prefers to blame, some decelerations in US and Chinese economies for the woes, rather than their austerity policies.

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If you assume that bad economic times are caused by deficits, it follows that the strategy to turn the economy around involves reducing the deficits. What is never clear is why when there is a deficiency in aggregate demand, further reducing aggregate demand becomes a good idea. That seems like a rather strong position to take, namely, cutting spending and laying off workers, hoping that the coincidental tax cuts will in turn stimulate demand. It assumes of course that the increase in consumer disposal income resulting from the tax cut would more than offset the reduction in government spending. However, a one-dollar cut in taxes can be expected to increase consumption by less than one dollar--since people collectively save part of every addition dollar income they receive. However, when the government decreases spending by one dollar, the act takes one dollar out of aggregate demand. The net effect of these two events--tax cuts and government spending cuts--is a reduction in aggregate demand. That, however, is just one piece of the problem for the economy. When the government aggressively targets deficit reduction (at the expense of employment and income as Gov. Brownback has done), the negative outcomes that follow for the economy are quite predictable.

Aggregate demand, i.e. spending is predicated on income levels in an inverse formulation. The rich can be expected not to increase their consumption when offered tax cuts. But from a rise in their disposable income, they will be inclined to save, invest and/or speculate in the financial market on risky securities that promise high returns. This assumption might not be too farfetched, since the rich can already satisfy their consumption needs and do not need to accomplish this with help from the government. However, people who are down on their luck (and cannot manage to pay their rent, tuition, car notes, mortgages, gasoline, etc.; even when the family is intact, collectively employed, paid Walmart wages, and earn a minimum wage; or are victims of a failed effort to extend unemployment benefits), such people can be expected to increase spending with alacrity from more disposable income due to a tax cut. Thus, it is not surprising that Kansas experienced just the opposite of revenue and growth expectations on the heels of its aggressive pursuit of a draconian restrictive economic policy.

Maybe, a preferred strategy for Kansas would have been to raise taxes on the rich as bizarre as that sounds. This would induce the rich to increase spending by paying their workers more and investing more in the company's infrastructure and equipment. What would animate such a strategy? Avoidance of income transfers to the much-maligned Federal government. Furthermore, if you believe that deficits cause interest rates to rise, and that higher interest rates discourage investment, then you have to question why this has not happened in the present economy. Although the deficit is down, interest rates remain stubbornly low, and there has not been a spurt in new investment.

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If after the elections of November 2014, Gov. Brownback's Kansas experiment is inflicted on the rest of the nation, we could expect a re-play of the Kansas dismal economic performance on the larger economy. There will be more government layoffs; perhaps more cuts in top marginal tax rates, leading to a widening in income inequality. This won't bode well for the nation.

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Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 

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