Unconventional “Wisdom” on Fiscal Policy and GDP Growth

John Tamny says the low real GDP growth last quarter was actually good news if you are willing to turned conventional wisdom on its head:

GDP measures the total dollar amounts of goods and services produced by people, businesses, property, and governments located in the United States. Government spending grew just 2 percent in the third quarter, and while this lower number weighed on nominal GDP gains, it’s a fallacy to assume that governments can tax the private sector and actually stimulate real growth by giving back what they’ve taken. Lower government spending, if it becomes a trend, will in the near-term subtract from GDP growth, but stimulate real growth over the long-term … Strong GDP numbers in recent years have at times been misleading (and belied by subpar stock market returns), and the apparently weak third-quarter reading was equally deceptive. Lower government spending, a rising dollar, normalized property values, and a capital surplus all drove the nominal number down – but all are bullish in terms of real economic growth. Conventional wisdom has once again been turned on its head.

If he is trying to say that less fiscal stimulus leads to more national savings and investment in the long-run, I agree. But maybe someone should get Mr. Tamny a copy of The General Theory of Employment, Interest and Money. Lord Keynes noted over 70 years ago that if investment failed to increase by the increase in national savings, we would see a recession. I’m a little surprised that Mr. Tamny did not notice that the growth in government purchases actually exceeded the growth in GDP. And as Tamny is hopeful that investment demand might increase, how could he not notice that overall investment demand fall last quarter? If he wants investment demand to rise – maybe he and his National Review crew should cease and desist with their FED bashing especially since they can’t make up their minds whether monetary policy is too expansionary or too tight.

But the real winner for having one’s head on upside down is Peter Ferrara:

The height of the Reagan economic recovery occurred in 1986. And what a recovery it was … And by 1981, every major economic indicator was headed in the wrong direction. In the 1982–1983 period, however, every major indicator quite literally turned around.

Shall we introduce Mr. Ferrara to the NIPA tables from BEA? Real GDP growth during 1980QIV and 1981QI was 8% on an annualized basis. The overall growth rate for 1981 was 2.5% but we did slip into a recession in the latter part of 1981. Mr. Ferrara seems to also not realize that real GDP fell by 1.9% during 1982 – a fact someone else seems to not realize. Ferrara’s revisionist history gets worse when he tries to explain this comment:

The GOP must return to Reaganomics (and Gingrichomics) as it sets sail for 2008.

It seems Mr. Ferrara believes that the tax burden was lowered during the 1990’s even if most rightwingers argue that it was increased during the Clinton Administration. While most rightwingers argue that the Reagan deficits were due to runaway Federal spending, Mr. Ferrara would have his readers buy into that Kudlow line about cutting Federal spending “Reagan style”. Of course, the facts show that the ratio of Federal spending to GDP neither rose nor fell to any appreciable degree during the Reagan years.

But why 2008 and not now? Does the National Review just wish to ingore the large Federal deficits for the next two years? Oh wait – the GOP does not have a plan to deal with the deficit. After all – they created it so it is up to the Democrats to deal with it.