Michael Barone: Spending cuts may be answer to slow economic growth

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Politics,Michael Barone,Politics Digest

The Dow set a new high on Tuesday, but the larger economy is a different story. What if today's sluggish economic growth turns out to be the new normal? That's the unsettling question asked by some of our most creative economic thinkers.


Take Tyler Cowen, author of the e-book (belatedly published in print) "The Great Stagnation." Economic growth is the product of increases in the labor supply and productivity, he argues uncontroversially.

But the U.S. labor force -- even assuming we get back to full employment -- is not increasing as rapidly as it did when baby boomers and Gen-Xers were reaching their working years.

As for productivity, Cowen argues that we simply haven't had the kind of innovations in technology or means of production that we saw in the late 19th and early 20th centuries.

Advances in information technology, he writes, have produced nothing like the productivity gains produced by the development of electricity, the synthesis of ammonia, the invention of the internal combustion engine and the development of new metal production technologies -- gains documented in Vaclav Smil's book "Creating the Twentieth Century: Technical Innovations of 1867-1914 and Their Lasting Impact."

In response to Cowen, Megan McArdle, of the Daily Beast, writes, "We are not prepared for low growth: culturally, economically or psychologically."


That's why we had government policies subsidizing people borrowing to buy homes and pay for college.



But in a slow-growth, new-normal economy, it doesn't make sense to borrow to buy a house whose value will only stagnate. It doesn't make sense to take out college loans for degrees that won't get you a job.


And the policy of transferring money from current workers to retirees -- Social Security, Medicare -- simply isn't sustainable if current workers aren't going to be producing and earning substantially more than those they're subsidizing.

As McArdle writes, "Government accounting is explicitly based on the assumption that spending grows, in real terms, every year -- difficult to achieve unless the economy grows at least as much."

Which suggests a question: Is new-normal, slow growth inevitable? Even if you accept Cowen's argument that productivity-enhancing innovation occurs sporadically, can't America do better than it has in the past five (or, if you like, dozen) years?

Barack Obama has been trying to stimulate the economy with record-high government spending funded by higher tax rates and Fed Chairman Ben Bernanke's low interest rates.

But as Stanford economist Michael Boskin points out in the Wall Street Journal, "Japan tried that, to little effect, in the 1990s." Slow growth has become the new normal there.

There are alternative policies. One is to cut government spending, or cut it more than you raise taxes. As Boskin points out, the Netherlands in the mid-1990s and Sweden in the mid-2000s "stabilized their budgets without recession [with] $5-$6 of actual spending cuts per dollar of tax hikes."



Of course, policies can't be transported mechanically from one country to another. Circumstances and customs inevitably differ.




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