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Desperate Keynesians

February 5, 2013 in Economics

By Richard W. Rahn

Richard W. Rahn

What do you do if the facts don’t support your beliefs? If
you are honest, you will rethink what you previously believed. If
you are a Keynesian economist, though, like New York Times
columnist Paul Krugman, you make silly assertions. In his Jan. 31
column, Mr. Krugman said he wants to see “some example,
somewhere, of austerity policies that succeeded.”

If you are a Keynesian school economist like Mr. Krugman, you
define “austerity” as a reduction in government
spending as a percentage of gross domestic product (GDP). If you
are a classical Austrian school economist, you view a reduction of
government spending not as austerity, but a growth-enhancing

Mr. Krugman seems to have forgotten that the government share of
GDP dropped after Reagan was able to get most of his policies
through the Democrat-controlled Congress (which Mr. Krugman would
define as austerity). The economy boomed and employment soared.
Likewise, when government spending was reduced as a share of GDP
during the Clinton administration and the Republican Congress, the
economy and employment boomed.

What do you do if
the facts don’t support your beliefs?”

Perhaps the most dramatic example of the success of what Mr.
Krugman calls “austerity policies” is Sweden. Sweden
expanded its welfare state and government spending dramatically in
the 1960s, ‘70s, and ‘80s, until government spending as
a percentage of GDP reached 67 percent by 1992, the public debt
reached 70 percent, and the deficit was 11 percent of GDP.
Meanwhile, per-capita income fell from fourth-highest in the world
to 14th. The Swedes reversed course in the mid-1990s, chopping the
relative size of government by a quarter, cutting the top marginal
tax rate by 27 points, and this year, cutting the corporate
income-tax rate to 22 percent (in contrast to the U.S. rate of 35

As a result of the economic reforms, Swedish debt is now only 37
percent of GDP, and the country is running a budget surplus. In its
Feb. 2 report on the Swedish economic renewal, the Economist
magazine notes that over the past two decades, “This allowed
a country with a small, open economy to recover quickly from the
financial storm of 2007-08.”

Like Sweden, Canada had allowed government to get too large by
the mid-1990s, and growth stagnated. Canada cut the relative size
of its government by about 20 percent, cut taxes, including the
corporate income tax that is now only 15 percent, and moved to
other pro-growth policies. The result is that rather than
continuing to fall further behind the United States, it has been
gaining on us. One positive sign is that the Canadian dollar has
risen from …read more
Source: OP-EDS  

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