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EDITORIAL: Failure to stimulate
Continuing to borrow and spend is a recipe for economic malaise
There’s nothing stimulating about the current state of the global economy. Job creation is on the decline in the United States, and the European Union is in the third year of a worsening debt crisis. Growth is nowhere to be found on either side of the Atlantic.
As Federal Reserve Chairman Ben S. Bernanke prepares to testify Thursday before the Joint Economic Committee, he ought to consider that there’s nothing he can do about it. With interest rates close to zero, there’s nothing left in the monetary-policy bag of tricks. Printing up more money, which the chairman calls “quantitative easing,” is not the answer. Keynesians like Larry Summers, the chief White House economist under President Clinton, recognize this and insist the solution is to borrow more money to stimulate the economy - as if the federal government has been practicing austerity for the past few years.
Mr. Summers argues private businesses haven’t borrowed enough to invest and jump-start the economy. Thus, the government must do so because interest rates remain remarkably low. The nominal interest rate on 10-year bonds is a low 1.5 percent, and close to zero for shorter-maturity bonds.
We’re borrowing so much already that the deficit this year is expected to be $1.2 trillion. That is more than the $831 billion spent under President Obama’s American Recovery and Reinvestment Act (ARRA), the so-called stimulus. If the big spenders were right, that should have been plenty to get the economy moving, yet our annual growth rate is a paltry 1.9 percent and the rate of job creation has been falling.
Even if the government chose to increase borrowing simply because it’s a bargain, there is little reason to believe that taking on more public debt would reinvigorate the economy. As Stanford economist John Taylor estimated, at the height of the Obama administration’s stimulus spending binge, ARRA reached 0.21 percent of gross domestic product, and federal infrastructure spending was 0.05 percent of GDP. That spending spree didn’t get the economy going, but it did come with a price.
Debt is 100 percent of U.S. GDP now and projected to explode to 180 percent by 2035, according to estimates by the Congressional Budget Office. That will exact a long-term cost on economic growth. Moreover, maintaining near-zero interest rates hurts savers, the retirees and others who depend on their holdings of Treasury bonds and government securities for their incomes. Estimates of these holdings vary between $9 trillion and $18 trillion, so a 1 percent change in yield translates to $52 billion of consumption and 493,000 jobs - more than seven times as many as were created in May.
There’s nothing productive about the government sector. The solution to America’s economic woes won’t be found in what government can do, but what the private sector is allowed to do. It’s time to admit the easy money, borrow-and-spend policies have failed and return to the limited-government principles that allow entrepreneurs to succeed.
The Washington Times
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