(p. A19) You can’t read models, but you do talk to entrepreneurs in Racine and Yakima. Higher deficits will make them more insecure and more risk-averse, not less. They’re afraid of a fiscal crisis. They’re afraid of future tax increases. They don’t believe government-stimulated growth is real and lasting. Maybe they are wrong to feel this way, but they do. And they are the ones who invest and hire, not the theorists.
The Demand Siders are brilliant, but they write as if changing fiscal policy were as easy as adjusting the knob on your stove. In fact, it’s very hard to get money out the door and impossible to do it quickly. It’s hard to find worthwhile programs to pour money into. Once programs exist, it’s nearly impossible to kill them. Spending now creates debt forever and ever.
Moreover, public spending seems to have odd knock-off effects. Professors Lauren Cohen, Joshua Coval and Christopher Malloy of Harvard surveyed 42 years of government spending increases in certain Congressional districts. They found that federal spending increases dampened corporate hiring and investment in those districts.
For the full commentary, see:
DAVID BROOKS. “A Little Economic Realism.” The New York Times (Tues., July 6, 2010): A19.
(Note: the online version of the article is dated July 5, 2010.)
The research referenced is:
Cohen, Lauren, Joshua D. Coval, and Christopher J. Malloy. “Do Powerful Politicians Cause Corporate Downsizing?” NBER Working Paper No.15839, March 2010.