From Heritage:
Every dollar the government spends must first be taken from the private sector. Whether the government pays for its spending through explicit taxation, or the hidden tax of inflation, or through borrowing, public activity crowds out private activity.
In short, government spending takes away as much or more as it adds to the economy.
That’s EJ Antoni in June 2023, arguing that the US economy was in recession (I think based on the two quarter drop in GDO, which has now been erased by the BEA’s annual update). Interestingly, that’s exactly the same sort of model that Brian Riedl — then at Heritage Foundation, now at the Manhattan Institute — used 13 years earlier in this WashTimes article:
But there is one problem with the government stimulus theory: No one asks where Congress got the money it spends.
Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.
It is intuitive that government spending financed by taxes merely redistributes existing dollars. Yet spending financed by borrowing also redistributes existing dollars today. The fact that borrowed dollars (unlike taxes) will be repaid some years later does not change that.
I would’ve thought (actually thought in 2010) that conservative economists with any credibility would’ve moved beyond simple metaphors. As far as I can tell, Heritage macroeconomists still rely upon some sort of Classical (heck not even New Classical!) models.
Personally, I think Dr. Antoni might’ve been a bit less absolutist in his declarations given Chapter 1 of his PhD dissertation (although I am a little dubious of the instruments he used in his 2SLS regressions).
Digression: Does anybody know what is the status of the lawsuit Heritage brought against Treasury for (allegedly) changing the definition of recession?
Link.
Complete crowding out may be the implication of a traditional classical model but those model assert we are always near full employment. To make such a claim at the same time as saying we are in a recession (below full employment) is just stupid. Then again we are talking about people at the Heritage Foundation.
The whole concept that public (collective) spending is “crowding out” but private (individual) spending is not (crowding out) – makes no sense to me. It seems build on the idea that the public goods and services are of no value but the private goods and services are. I would argue that the public building of a bridge is a lot more valuable than the private purchase of a fifth pair of sneakers or some Chinese made trinkets in the dollar store.
“I would argue that the public building of a bridge is a lot more valuable than the private purchase of a fifth pair of sneakers or some Chinese made trinkets in the dollar store.”
I would agree. But Trump says with his golden sneakers you can jump all the way across the Mississippi River.
“the Department of Commerce released troubling data on the anemic economy, showing that gross domestic income (GDI) shrank in the previous six months.”
I do declare – it is a real struggle to keep Antoni’s lies straight. First this troll defines a recession as two quarters of real GDP declining. But here he is talking about two quarters of real GDI declining. BTW I checked with the latest from BEA (via FRED) and real GDI rose in the first quarter of 2023.
“By the Treasury Secretary’s Own Definition, We’re Back in Recession”
My God – his title is a flat out lie. Yes Yellen talked about real GDO as an indicator but she never defined a recession of two quarters of declining GDO, GDI, or GDP. How many lies can Antoni tell? Maybe even more than his idol – Trump.
Heritage sued over the definition of a recession? Seriously?
BTW that link to the lawsuit does not work. Please fix it so we can all have a good laugh!
“the rebound in the prime-age participation rate is entirely due to foreign born (primarily illegal labor) workers.”
Antoni’s recent Twitter. It seems he is dusting off his Great Replacement BS again. Maybe someone should fact check his latest racist lie.
Real Government Consumption Expenditures and Gross Investment
https://fred.stlouisfed.org/series/GCEC1
Given how utterly dishonest Antoni has been, I decided to check and it turns out that from 2020QII to 2022QII, real government purchases declined considerably. Yes they have been rising since. It would be interesting if someone compared government purchases to GDP over this period. We know Antoni will not bother as he has never been honest about any economic topic he babbles about.
“What Kind of Macro Model is the Heritage Foundation Using?”
I like to test any macroeconomic statement based on money or credit flows against real economic variables. Does government spending (borrowing, taxation) make some input to production unavailable to private firms or households? In aggregate terms, as long as there is an output gap, then probably not; government spending mobilizes previously unused resources. There’s the government spending multiplier, in all its variability.
That’s just the simest way to think about real economic variables. Only slightly less simple, where does government spending end up? Well mostly, it ends up in the hands of the household or business sectors. Government pays business to do things. Government pays households to buy things from businesses. The result is not that business does less, but rather that it does different things than it otherwise would have, based on government and household preferences.
As to the model Heritage using, it’s most likely just Y=C+I+G. So if Y is fixed <cackle! snort!), the an increase in G requires a reduction in C or I. This – y'all know this one – this mistakes an accounting identity for a dynamic behavioral model. Nothing about Y=C+I+G stipulates that Y is fixed. Nothing.
In fact, a lot of macro looks at how to jigger things around so as to boost C or I, which in turn boosts Y, often by manipulating G. (Please tell me you realize I implies S and G implies T, so that manipulating G implies manipulating T. Yes? Good.) The claim that any government spending must come at the expense of private spending, 1 for 1, ignores everything in economics except Y=C+I+G, and even gets Y=C+I+G wrong.
The only reason to assert Y is fixed is the premise that Y is always at full employment. That is the presumption of old fashion classical economics.
But it seems the Heritage boys do not even realize that. Which means they are as dumb as Steven Koptis when it comes to macroeconomics. Which is to say the school that gave Antoni a Ph.D. should hang its head in shame.
At full employment, tax cuts do nothing for growth, but does pandemic the deficit. So if Antoni argues that government spending can’t avoid hurting private output, then he’s stuck with the implication that tax cuts can’t stimulate growth.
Summers and Delong showed that fiscal expansion can be self-financing when the economy is so far in the dumps that the central bank won’t tighten to offset fiscal expansion:
https://www.brookings.edu/articles/fiscal-policy-in-a-depressed-economy/
That is, as we say, a special case, but demonstrates clearly that Antoni’s fixed Y argument is also a special case. Antoni claims its an iron law – bad economics. And the post-housing-crash expansion, when Summers and Delong wrote, provided ample evidence that output gaps can remain wide for years.
“Antoni claims its an iron law – bad economics.”
May I rearrange this?
It is an iron law that any and all of Antoni’s claims are bad economics.
Pandemic the deficit? Auto-correct is really taking the piss here.
Increase the deficit.
Riedl’s 2010 spin was called the Fatal Flaw of Keynesian Economics so he cannot rest his laurels on the classical assumption of full employment. Besides we were far below full employment at the time.
His argument is a really stupid display of someone who does not get financial markets. It was ridiculed at the time but be my guest taking more shots at his really stupid spin.
I found it interesting that in your attempts to figure out what Riedl was trying to say briefly brought up Ricardian Equivalence. CoRev tried to weigh in with some canned definition and his usual confusion. Alas I was not reading your blog regularly back in 2010. Had I been, I might have said the following.
Ricardian Equivalence is a version of the Ando-Modigliani life cycle model that sets expected future net taxes as being equivalent to the expected future government purchases in a present value sense. How actual net taxes are imposed does not change consumption unless there is some change in the expected future government purchases.
Now it is true that some permanent change in government purchases will lead to a long-term net taxes which would lower consumption by a corresponding amount. But there are lots of changes in government purchases that are temporary. A short-term war is one example (OK that 2003 invasion of Iraq was longer than initially advertised). An even better example would be the acceleration of government investment in things like infrastructure (hence Biden’s recent legislation). That would not lead to a very much more in long-term taxes. Ricardo and Barro were clear on that. And if one draws out the macroeconomic implications, any reduction in consumption would be very small relative to the increase in government spending.
I sort of doubt Riedl or Antoni get any of this. And as hard as he tried, neither did CoRev.
We Bring The News is a Facebook page you might want to visit as its coverage of Trump’s attempt to do McDonald’s is a laugh riot.
One last teenie quibble:
“In short, government spending takes away as much or more as it adds to the economy.”
As much or more? Leaving aside all the reasons Antoni is wrong about taking away as much, where did “or more” come from. He offered no argument for anything but a 1-for-1 swap. “Or more” is simply smuggled in with all the other words.
If Y is fixed , then increasing G cannot decrease Y. If Y isn’t fixed, then Antoni has no argument. Jeebus!
I think Antoni was trying to say having more public consumption and less private consumption must reduce efficiency. Now if he is saying this as an iron law – then he is dumber than a rock. Anyone who has studies public finance at a serious school knows there are situations where the public provision of services is more efficient. But Antoni went to a school no one has ever heard of and has yet to publish a real academic paper anywhere.
in the first argument, Antoni wants to argue against money multipliers. hence one for one. in the second argument, he wants to allow for money multipliers. hence “as much or more”. he is arguing for and against the same item, depending on what best serves his interest at the time. dishonest.
but lets put something into perspective. when a tax cuts occurs, the wealthy do not immediately deploy that money into the economy. what they deploy is the extra 5% they collect from the government off of the treasury bills they purchased to store that extra wealth. on the other hand, with a tax hike, the full amount of capital gets deployed by the government. not just the 5% the private sector would earn. from an efficiency and stimulus perspective, the government spending is vastly superior to the 5% offering the private sector would offer up. because there is absolutely no guarantee the private sector would put those funds directly into the economy. and if you want to argue that is what happens when the wealthy buy those treasuries to begin with, so the government can then spend the money, I ask you why we need to lose 5% to the wealthy for the government to distribute those funds in the first place? inefficient. tax cuts are an inefficient stimulus for the economy.
here is an example of trump “voter fraud”
https://www.cnn.com/2024/10/25/politics/benedictine-sisters-of-erie-pennsylvania-election-fraud-viral/index.html
a monastery full of nuns registered to vote is called fraudulent by the trump campaign, because, err, well, uhhh, who the hell knows. the canvaser simply claimed that the over 50 nuns living there simply did not exist, I guess. so why is the trump campaign targeting the simple, honest nuns living in Erie Pennsylvania? it looks as though trump is now targeting christians as the new enemy from within. let that be a warning to my fellow christians. trump is not a friend, and you are now becoming a target of his rage. like anybody else who aligns with trump, he will turn on you as well.
even troubled souls like rick stryker and econned have seen the trump mistake, and are supporting Harris for the election. trump is no longer aligned with the Reagan republicans. the traditional republicans are all dropping support for trump and voting Harris, in support of democracy and the constitution. Reagan, Bush, Cheney. they have identified the true enemy from within. trump.
Gods and services provided by government counts just as much in GDP as gods and services provided by the private sector. There is absolutely no economic difference whether 10 people each purchase 10 books or they pool that money and collectively purchase 100 books (nicely sharing and exchanging). Private spending or collective spending is exactly the same from an economic perspective.