Do Economists Agree with Obama?

“There is no disagreement,” said then-President-elect Barack Obama Jan. 9, “that we need action by our government, a recovery plan that will help to jump-start the economy.”

No disagreement?

During the last economic downturn — seven years ago — I interviewed economics professor George Reisman, author of the book Capitalism: A Treatise on Economics.

He reacted to a newspaper article that called government spending a “potent recession cure when administered properly.”

Reisman: That is a view held by a large school of economists, perhaps the majority school, for the last 60 years or so. That’s the Keynesian school, but there are other economists, like the Austrian school, which holds a very different position.

In their view, an essential requirement to a sound economy is balanced budgets with small government. We want government limited to protecting life and property.

Capitalism: A Treatise on Economics by George Reisman

The government should be attacking terrorists, providing police protection against common criminals, and that should be essentially it, and the people in an environment free from terror will proceed to provide for themselves economically.

That has been the basic philosophy on which the United States was built.

Elder: I know you’re not a journalist, but isn’t it unfair to make (the “recession cure”) statement as if it’s a fact?

Reisman: No, it is definitely not a fact, and it displays considerable ignorance which leaves out of account any alternative point of view, and in fact, it’s easy to argue that deficits can pretty well worsen recessions with depression, because one of the main characteristics of any severe recession is widespread bankruptcies.

Deficits contribute to that by withdrawing capital from availability for business. The deficits absorb savings, and those savings are then not available to be lent to business firms in need of credit, so more firms go under than would otherwise have gone under, and that worsens the depression or recession.

Elder: Is it too strong to say that this guy is simply wrong?

Reisman: He’s definitely wrong. It’s not deficits in and of themselves that promote spending, although he seems to think that a dollar spent by the government is somehow more beneficial than a dollar spent by you or me, which is ridiculous.

What people really have in mind, to advocate this position, is that the government will run at a deficit and not borrow from the general public but will manufacture the money — print it. So they’ll enlarge total spending. So it’s this mentality I would think more than anything else that’s been responsible for our problems with inflation for the last 65 years or so.

Every year, there is more and more money out there. The rise in spending just outstrips the increase in production and the supply of goods, and so prices continually rise. .

Elder: (This article asserts) you can spend government money to get us out of a recession.

Reisman: That’s definitely the idea that someone would come away with, and one would have no idea that one would have an alternative way to get out of the recession or depression or what one got us into in the first place.

What put us into this recession and what causes every recession is precisely a preceding policy of inflation the tremendous stock market boom fed by the Federal Reserve’s rapid expansion of money.

There was additional money poured into the stock market, and that raised prices, and when they decided not to continue that then the market fell.

It would not have had that terrible fall if it had not had this artificial rise first, engineered by the Fed a major aspect of inflation itself.

Elder: The (article) quotes an economist from the so-called “non-partisan” Brookings Institution: “Tax hikes do less damage to the economy during a downturn than an equivalent amount of spending cuts.” What does that mean?

Reisman: Keynesians argue that if you increase government spending by a dollar and increase taxes by a dollar, that serves to increase national income by a dollar. And that’s what’s being argued here.

The joke of this argument is that the Keynesians are really very ignorant of aggregate economic accounting. It’s actually possible that by raising taxes a dollar and government spending a dollar, you can raise national income a dollar. But the way that would happen is only if the taxes were paid with funds that otherwise would have bought capital goods, like machinery and equipment.

Elder: Why the widespread myth that FDR’s policies got us out of the Depression?

Reisman: I think that fits with the statist preconceptions. If you view the government as some kind of deity and you think it’s omniscient and omnipotent, then that’s your basic expectation.

This interview took place seven years ago. Days ago, the libertarian think tank Cato Institute took out a full-page ad. It listed more than 200 economists — by name — who reject more government spending and instead urge tax cuts and smaller government. The full-pager ran in “minor” newspapers, such as The New York Times, the Los Angeles Times and The Washington Post.

So, President Obama, please read these economists’ “disagreement.” Whip out your BlackBerry.

Larry Elder is a syndicated radio talk-show host and the author of Showdown: Confronting Bias, Lies, and the Special Interests That Divide America. He is also host of daytime TV's "The Larry Elder Show," and enthusiastically recommends Atlas Shrugged to visitors of his web site.