Zhiyu Li
Investment
Dr. Richard W. Taylor
October 10th 2012
The Magnitude of the Mess We’re In
The annual spending by the federal government now exceeds the 2007 level by about $1 trillion. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. On the other hand, the Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up. The author thought economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform.

Zhiyu Li
Investment
Dr. Richard W. Taylor
October 10th 2012
World War II Stimulus and the Postwar Boom
Despite two years of fiscal and monetary stimulus, the U.S. economy is sagging. During World War II, there was no investment in civilian infrastructure and the government placed severe restrictions on consumption. Today, households carry a much greater relative debt burden than they did in 1929, largely due to a 25-year mortgage binge. Between 1980 and 2007, disposable income grew at 5.9% per year while household indebtedness grew at 8.7% per year—a clearly unsustainable situation. If we wanted to replay the economics of World War II (without the war), it would mean high consumption taxes aimed at the middle class, and putting 30 million Americans to work at minimum wage or less. No serious politician could put forward such a plan. Policies aimed at reigniting the credit-driven consumption boom of the last 25 years won't work. The author believes that the key policy aims should be removing the tangle of tax, policy, regulatory and human-capital impediments to domestic private investment.

Zhiyu Li
Investment
Dr. Richard W. Taylor
October 10th 2012
Keynesian Economics vs. Regular Economics
In regular economics, the central ideas involve incentives as the drivers of economic activity. Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working. And also the financing of a transfer program requires more taxes in the case of deficit financing. These added levies likely further reduce work effort—in this instance by taxpayers expected to finance the transfer—and also lower investment because the return after taxes is diminished. And there is zero evidence that deficit-financed transfers raise GDP and employment. Roosevelt began relatively modest deficit spending that arrested the slide of the economy and resulted in some astonishing growth numbers. The fraction of the unemployed who are long term (more than 26 weeks) has jumped since 2009—to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession.

Zhiyu Li
Investment
Dr. Richard W. Taylor
October 10th 2012
Government Spending Is No Free Lunch
Team Obama is reportedly using a "multiplier" effect of government spending on economic output around 1.5, which means they spend too much money on government spending. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates -- especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant. On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis. Just as in the 1980s, when extreme supply-side views on tax cuts were unjustified, it is wrong now to think that added government spending is free.

Zhiyu Li
Investment
Dr. Richard W. Taylor
October 10th 2012
Why the Spending Stimulus Failed
President Obama and congressional leaders confronted calls for four key fiscal decisions: short-run fiscal stimulus, medium-term fiscal consolidation, and long-run tax and entitlement reform. But economic theory, history and statistical studies reveal that more taxes and spending are more likely to harm than help the economy. In a survey of fiscal policy changes in the OECD over the past four decades, Harvard's Albert Alesina and Silvia Ardagna conclude that tax cuts have been far more likely to increase growth than has more spending. We should lower marginal effective corporate and personal tax rates further (for example, along the lines suggested by the bipartisan deficit commission's Erskine Bowles and Alan Simpson). We should quickly enact an enforceable gradual phase-down of the spending explosion of recent years. That's what the president and congressional leaders should initiate. Then let the equally vital task of long-run tax and entitlement reform proceed.