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'All in' for Alesina! March 25, 2013 11:00 AM | Tagged as Alesina Recession

WSJ March 14, 2013 “Escape from Spending Hell” by Daniel Henninger

Some years ago, right about the time the Great Recession began, I learned about Economics Professor Alberto Alesina of Harvard. His work studies recessions and government responses to them. He groups the governmental responses into two camps: The Keynesian camp of tax and spend, and the classical camp of lower taxes and lower spending.  Guess which one works? Read Henninger’s piece and you’ll see that cutting spending works. Tax and spend does not.

Mr. Obama is clearly a Keynesian. He believes in the fictitious Keynesian multiplier which purports that for every dollar of government spending, the economy will grow by some multiplier (allegedly greater than 1.0), thus jerking the economy out of its doldrums.  Keynesian’s believe the multiplier is somewhere in the 1.5 range.

However, this is wrong headed. It forgets the government does not have a “money tree” growing on the White House lawn. When you subtract the money that the government took from the productive working class, the Keynesian multiplier is more like 0.5. Yes, there is some growth initially, but it is a blip which quickly dissolves.

Many years ago, when I was about 16, my father was asked to take a few business courses at Arizona State University to help him as a new executive for the large company that fed our family. One night he came home all pumped up about this Keynesian stuff the Econ professor was pushing. He tried to explain it to me. I finally asked – feeling a bit naïve and embarrassed – “Dad, Tell me again how spending money by the government grows an economy?” He eventually quit trying. It was unexplainable.

Too bad Obama doesn’t have the smarts of Max Llewellyn who knew when he had been taught something wrong – something that an inexperienced 16-year old could see through. 


Posted By The Biz Bucks Guy
Posted in MacroEconomics | 1 Reply
Sunday, June 16, 2013 10:05 AM
That might be because none of them are prisnpoog actual tax cuts?As to Labour, a tax cut without a spending cut is just deferred taxation.The Tories are all over the place. They've promised to freeze council tax. Morons. How does that stimulate the economy? Besides overall reduction of deadweight cost of taxation/waste, tax cuts mainly stimulate economy if you cut rates in the future.The Lib Dems have had a couple of good ideas but their bad ideas (increasing green taxes and capital gains tax) cancels it all out again.
Posted by: Emma

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