Just a few years ago, most homeowners were convinced that property values could only increase. So it made sense to take out second mortgages and home equity loans, even if that left them underwater in the short term.
After all, their home would eventually increase in value, allowing them to pay off the additional loans. In the meantime, they’d enjoy free money to renovate, pay for a child’s education, or simply spend on luxury purchases such as expansive vacations or, maybe, a boat. Of course, markets have a way of correcting such faulty thinking. Famously, the housing bubble popped, and the good times stopped rolling. As a nation, we’re still dealing with the financial fallout.
There’s a lesson here for lawmakers: Boom times won’t last forever, so it’s better to act to head off trouble instead of waiting for a bubble to pop and trying to clean up the resulting mess. Some of our leaders are taking heed.
House Speaker John Boehner, for example, says he’ll insist on “cuts of trillions, not just billions” from the federal budget before he’ll agree to allow the federal government to borrow more money.
Not every observer thinks this is such a good idea.
“[I]f the speaker truly believes that it would be ‘more irresponsible’ to raise the debt ceiling without instituting deficit-reduction measures than not to raise it at all, we’re in a heap of trouble,” Ruth Marcus opined in The Washington Post on May 11.
Well, the trouble is that our government already owes $14.3 trillion. We won’t reduce that debt by agreeing to borrow more. But that’s not what has Marcus upset. She says Boehner’s being dishonest when he points out that, “The recent stimulus spending binge hurt our economy and hampered private-sector job creation in America.”
She writes that “no reasonable economist argues that it hurt the economy in the short term.” Further, “Economists Alan Blinder and Mark Zandi estimated in a July 2010 paper that without the stimulus spending, the unemployment rate would be 1.5 percentage points higher.”
That’s all well and good, but as “reasonable economist” Alan Reynolds at the Cato Institute wrote last year, Zandi’s estimates are based on an unproven Keynsian multiplier effect. He simply takes the amount the government spends, multiplies it by a number, and thus obtains a positive number. The formula predicts that government spending will grow an economy, even though the stubbornly high unemployment rate argues otherwise.
Further, “recent academic studies of real world events have been unable to find a multiplier effects even half as large as Zandi’s model assumes,” Reynolds wrote at The Daily Caller. “They find the addition to GDP [Gross Domestic Product] is significantly smaller than the addition to the national debt -- a bad bargain indeed.”
If deficit spending was effective at creating jobs, the economy ought to be soaring. After all, President Bush’s final year in office was marked by a $400 billion deficit. In Barack Obama’s first year, domestic discretionary spending (including stimulus funds) jumped 80 percent over those 2008 levels. “The record $1.6 trillion in deficit spending over the past fiscal year would have already overheated the economy” if Zandi’s model worked, Brian Riedl of The Heritage Foundation wrote in 2010.
Marcus also says Boehner is wrong when he says that: “The truth is we will never balance the budget and rid our children of debt unless we cut spending and have real economic growth. And we will never have real economic growth if we raise taxes on those in America who create jobs.”
“Never?” she wonders. “Under President Clinton, taxes were raised, primarily on the wealthy. During the eight years of his administration, the economy grew by an average of close to 4 percent.” Tax receipts did climb during the late 1990s, but that was mostly because of the dot.com bubble.
When that popped, our economy plunged into recession. “This was a prewar-style recession, a morning after brought on by irrational exuberance,” liberal economist Paul Krugman noted in 2002. “To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
That housing bubble didn’t end well, of course. And our current level of government spending can be fairly described as a bubble, too. Eventually borrowers will stop lending our government money. At that point it won’t matter whether the government increases its debt ceiling. It’s a bubble we cannot afford to allow to pop.
The best way to start solving our problems is by reducing federal spending without increasing taxes. Our government has a spending problem. Boehner’s correct. It’s time to start cutting.
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