Tags: Cochrane | government | spending | tax

U of Chicago's Cochrane: Higher Govt Spending Isn't the Answer to Slow Growth

By    |   Thursday, 03 July 2014 10:34 AM

Economists such as Larry Summers, Brad DeLong and Paul Krugman advocate increased government spending to help boost the economy out of its slow growth path.

But that's not the answer, says John Cochrane, professor of finance at the University of Chicago.

"If you look hard at New-Keynesian models, [which these economists' recommendations are based upon], this diagnosis and these policy predictions are fragile," he writes in The Wall Street Journal.

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"There are many ways to generate the models' predictions for GDP, employment and inflation from their underlying assumptions about how people behave. . . . None produces our steady low-inflation slump as a 'demand' failure."

Cochrane prefers the thinking of other economists.

"John Taylor, Stanford's Nick Bloom and Chicago Booth's Steve Davis see the uncertainty induced by seat-of-the-pants policy at fault," he notes.

"Ed Prescott emphasizes large distorting taxes and intrusive regulations. The University of Chicago's Casey Mulligan deconstructs the unintended disincentives of social programs."

The solution is reform of the tax code, "our cronyist regulatory state, our welter of anti-competitive and anti-innovative protections, education, immigration, social program disincentives and so on," Cochrane states.

Meanwhile, recent reductions in government spending have helped reduce the budget deficit. The Congressional Budget Office projects that the gap will shrink to $514 billion in fiscal year 2014, which ends Sept. 30, from $1.4 trillion in 2009.

During the next 10 years, "all federal spending apart from outlays for Social Security, major health care programs and net interest payments is projected to drop to its lowest percentage of GDP since 1940," a CBO report says.

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Economists such as Larry Summers, Brad DeLong and Paul Krugman advocate increased government spending to help boost the economy out of its slow growth path.
Cochrane, government, spending, tax
307
2014-34-03
Thursday, 03 July 2014 10:34 AM
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