Friday, October 19, 2012

Bruce Bartlett's The New American Economy 1

I started Bruce Bartlett's The New American Economy: The Failure of Reaganomics and a New Way Forward.  Bruce Bartlett served in the administrations of Ronald Reagan and George H.W. Bush.

To be honest with you, there is a lot in this book that I do not understand.  But I'll blog about what I do understand, as I understand it.

The main point that I got out of my latest reading is that different economic approaches work in different contexts.  Keynesianism was appropriate during the time of the Great Depression, for that was when there was serious deflation, plus people were not spending much money.  Within that context, the Keynesian approach of printing more money (to elevate prices) and government spending was a panacea.  But Keynesianism did not work that well in the 1970's, when the United States was having a serious inflation problem.  In that period of stagflation, supply-side economics was beneficial, and Ronald Reagan helped to enact supply-side policies in the early 1980's.  Monetary policy needed to be much tighter to fight inflation, and Reagan accomplished that with Paul Volker of the Federal Reserve.  And the dramatic tax cuts under Reagan stimulated the economy.  According to Bartlett, the tax cuts were especially appropriate for that time because inflation was subjecting many people to a higher tax burden by putting them into the upper-income levels, even though they were not exactly rich and prosperous.  Their income only appeared that way due to inflation.

Bartlett is critical of the current Republican obsession with tax cuts, and he states that Republicans don't even consider the sorts of tax cuts that can stimulate spending, such as the Investment Tax Credit, which would encourage "business spending on capital equipment" (page 7).  Bartlett believes that Republicans push the same old tax cuts "out of dogma" and not because they have "any rational reason to believe that they would stimulate the economy" (page 7).

And yet, while my impression is that Bartlett holds that Keynesianism would be a good approach to the current financial crisis----that the government should spend money to stimulate the economy because people aren't doing so themselves, thereby contributing to deflation----he does believe that there will come a time for "fiscal retrenchment" (which probably means austerity), for increased government spending is inflationary, and there will come a time when inflation will be harmful rather than helpful.  But Bartlett has fears in the government-spending department on account of ballooning entitlement spending.  Bartlett maintains that a Value Added Tax (a sort of consumption tax) will be an effective way to "raise a lot of revenue at a very low cost in terms of lost output" (page 11).  Bartlett----at least in this book----does not appear to support taxing businesses and entrepreneurs at higher rates, for that can be deleterious to the economy.  But Bartlett maintains that the VAT is a preferable alternative, which can raise revenue for the government.

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