"Keynesians conveniently forget that the resources used to finance the additional government spending have to come from somewhere, either through taxes or through borrowing. If through taxes, taxpayers have less to spend. If through borrowing, the government absorbs resources that could have been invested in private firms.”

Obamacare, Stimulus, and Other Disasters

By David Gordon

[At the Brink: Will Obama Push Us Over the Edge? By John R, Lott, Jr. Regnery, 2013. Xvi + 320 pages. Book review by David Gordon.]

John Lott is best known to the public for his outstanding analysis of gun control legislation, but his research as an economist extends far beyond that topic; and he here gives us a devastating account that covers the full range of the Obama Administration’s economic policy.

Readers stirred to anger by the simpleminded statism of Paul Krugman will be delighted by Lott’s demolition of several of his claims. To those who urge that high taxes on the wealthy discourage investment, to the disadvantage of us all, Krugman often recalls the palmary era of the 1950s. Did we not then see very high taxes rates together with high rates of economic growth? “In the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years” (p.200, quoting Krugman.)

Lott is a master of economics statistics, and he quickly exposes a fatal flaw in Krugman’s argument. Capital moves much more quickly nowadays than in the 1950s; and if tax rates abroad fall significantly below the American exactions, investors will readily shift their funds to the more favorable foreign conditions. “But the world has changed substantially since the 1950s and even the 1960s. One major change has been increased international competition between countries over taxes. For investors. . .in international capital markets looking for the highest return, even a small difference in tax rates can determine where their money goes.”(p201)

If Krugman views high taxes as good, he likes government spending even better. Will not the multiplier, he asks, readily restore to prosperity a depressed economy? Government spending stimulates the economy more than tax cuts to individuals do, Keynesians like Krugman allege, because people siphon off some of the money they gain from tax cuts into savings. The government can more efficiently spend us into prosperity.

Lott rejects this dubious doctrine, on grounds both theoretical and empirical. “Barring true, concrete destruction, resources in the economy do not just disappear. Savings is not a black hole but always corresponds to real resources, somewhere in the economy, in some form or other. . .Keynesians conveniently forget that the resources used to finance the additional government spending have to come from somewhere, either through taxes or through borrowing. If through taxes, taxpayers have less to spend. If through borrowing, the government absorbs resources that could have been invested in private firms.”(pp.89-90)

Krugman would no doubt respond to Lott that the facts bear him out: austerity programs prolong economic ills and extensive government spending is needed to end a prolonged depression. Once more Lott is ready for his adversary. “My regressions find that increasing last year’s government expenditures (as a percentage of GDP) by 1 percent reduces per capita GDP by $184. Such an increase in spending reduces the figure for working-age population employed by about 0.5percent. The bottom line should be clear. Governments were unable to spend their way out of their problems. . . ‘Austerity’ may be a dirty word to some politicians, but the countries that followed Keynesian policy have assumed a triad of woes: poor GDP growth, poor job growth, and massive debt.”(p.102)

Lott does not confine his attention to general guidelines for economic policy but discusses specific programs as well. Of these Obamacare is the most controversial, and Lott makes clear from his chapter’s title what he thinks of it: “The Looming Obamacare Disaster.”

Strong words, no doubt; but Lott makes good his claim. For one thing, the program cannot succeed without large increases in the number of people who purchase medical insurance: that is the point of the controversial “individual mandate.” But the mandate is highly unlikely to achieve what its proponents hope for it. “The Congressional Budget Office estimates that in 2015, Obamacare will cause twenty million people to purchase insurance. That number is crucial to its cost estimate because fines and insurance premiums are supposed to cover the program’s costs. That number is also completely unrealistic. Higher insurance premiums will cause more people to drop their insurance. The ranks of the uninsured may actually increase. . . For all but the highest earners, then, it will make sense to skip the insurance and pay the fine. Americans will be able to save thousands of dollars every year by waiting to buy insurance until they are seriously ill or pregnant. . .And more and more will do so as the price of the ‘same’ insurance increases.” (pp.13-14)

Defenders of Obama care maintain that regardless of the program’s drawbacks, drastic action was needed to cope with a crisis in America’s health care. Lott’s response will surprise many, but it is based on his customary careful survey of the data. The supposed “crisis” does not exist. “Polls show that about 90% of Americans are happy with their health care. . .even the vast majority of uninsured Americans are happy with their care.” (p29)

One would expect a book by John Lott to say something informative about gun control, and our author does not disappoint us. It transpires that he met President Obama when both of them served on the law school faculty of the University of Chicago. “I first met him in 1996, shortly after my research on concealed handgun laws and crime had come to national attention. I introduced myself, and he responded, ‘Oh, you are the gun guy.’ ‘Yes, I guess so,‘ I answered. ‘I don’t believe that people should be able to own guns,’ Obama replied. I then suggested that it might be fun to have lunch and talk about that sometime. He simply grimaced and turned away, ending the conversation.”(pp.126-27)

Readers of Lott’s carefully documented work will learn a great deal of vital information about the American economy, all of it unfortunately unknown to the president who turned away.

Link:
http://www.lewrockwell.com/2013/08/david-gordon/economic-wmd/