Wow, really well put Steve. So simple we forget sometime: Innovation is the core of our economy!

Excellent presentation. A couple of questions…. What about outsourcing to Communist China? How about all the major international corporations setting up factories in communist China? What about transferring our technology to Communist China?

How do these factors get weighed?

This is the message we need as Republicans moving forward.

GDP is the major yardstick we use to measure health of the economy. GDP is the sum of Consumption, Investment, Net Exports, and Government spending. In a down economy, C, I, and Xn all go down. By increasing Government spending, we increase GDP (or at the very least mitigate drops in GDP). The increase in Government spending helps stave off a worse economic situation until recovery can take place. Conversely, reducing Government spending in a recession is EXACTLY what happened in the lead up to the Great Depression.

Including tax breaks targeted at those most likely to spend them (people with a lower Marginal Propensity to Consume – poor people) will also encourage Consumption, but in economics it’s much easier to pull a string than to push it. That is to say, it’s much easier to reign in inflation than it is to encourage spending and economic growth. The MPC is exactly why Reaganomics are junk science (just ask George H.W. Bush, an economist).

So, Government spending actually prevents total economic collapse in a recession, but used in conjunction with targeted tax cuts, it can stave off a worse economic situation and speed up a recovery.

[...] Congressional Steve Welch recently posted his economic policies on PA2010.  While I have a great appreciation for Welch’s personal success and the perspectives he brings, [...]

Since both President GHWB and I are both econ majors (though neither of us could be called an economist), I thought I might ask a couple of questions. If government spending was the solution, why did it take over a decade for the US economy to pull out of the Great Depression? FDR spent and spent and spent, but it was unsuccessful. Also, if it were so easy to reign in inflation Jimmy Carter is either the most inept president ever or it is substantially more difficult to reign in inflation that you believe. (I would argue “both” but I suspect that is a tangent for a different time.)

Steve is absolutely correct. Government has never increased the productivity variable in the Cobb-Douglas equation — Y = ALαKβ — where Y equals GDP and A is productivity. I suspect even President GHW Bush might tell you that the driving force in economic growth, increased productivity, can only be fueled by innovation.

We need more innovation, not less. We need less government spending, not more. We cannot afford to allow government to crowd out innovation. It will not only lead to economic stagnation, but inflation as well. In fact, President Carter gave economists a term to describe such a phenomenon — stagflation.

Government spending is merely one part of a multi-faceted solution. As I mentioned, well-targeted tax breaks also help. I’ve read plenty of arguments that FDR’s spending was insufficient, but there are certainly other factors involved. You’ll note that I did not say Congress’s unwillingness to engage in deficit spending was the direct and only cause of the Great Depression; however, it exasperated a situation that could have been less severe. You’ll also note that I said reigning in inflation is easier, not easy. It’s the pushing a string metaphor.

The Cobb-Douglas equation is great at the micro-level and it’s comforting because it makes so much sense mathematically, but it doesn’t function very well at the macro-level. Why are α and β constants over time? Both K and L differ over time and depending on the goods produced.

I agree, we need innovation. But to say that government spending during a recession stifles innovation is, in my humble opinion, rather silly. We have a classic issue of causation versus correlation.

And I am under the impression that anyone with a degree in economics may call himself an economist – a terminal degree is not required.

There were many causes of the Great Depression all fairly well explored by Freidman and Bernanke. The scandal of the GD is that in trying to make things better, the administration made things worse, even ended the nascent recovery in the mid-30s. Attempts to increase wages, created more unemployment. Attempts to stimulate demand, drove up prices beyond that which people could afford. The prescriptions almost killed the patient. But this all intellectual tangents to the issue at hand.

If we agree there are limited resources, everytime one actor takes a larger piece of the pie, there is less for everyone else. In this case, government spending must be paid for through taxes. The government taxes remove money that could be used for R&D from the economy and are paid to the government for spending, minus of course a bit of administrative costs. Higher taxes caused by government spending prevents companies from investing. This loss of investment — in new technologies, in educated scientists, in patents — shackles the innovation that Mr. Welch seeks to release.

I do agree with your tax cut point. We need to go further with broad based cuts. We need to preserve capital gains tax cuts to stimulate innovation. We need to get our corporate tax rates in line with our international competitors. And we need to give hard working families more of the wealth that they have created so that they can stimulate the economy.

“Economist” Tom – your comment shows a complete misunderstanding of deficit spending, GDP calculation, history, and just economics in general. Deficit spending is necessary in a recession; the disinclination to engage in deficit spending was one of the reasons why the Great Depression was as bad as it was. FDR’s spending helped, but it wasn’t enough. You’re making the exact opposite claim. The whole point of deficit spending is that you DON’T raise taxes in the short term. You balance the budget when the economy is back on the up and up.

Actually Greg, I understand it, but completely disagree with both its utility and point to the historical problems that it has deepened. Just to be clear, you are admitting that you have to raise taxes and crowd out investment and innovation in the medium term. I think even you might have to admit that there is no consensus that requires defecit spending in a downturn.

You say FDB spent too little, I say too much. I also say that he overregulated, which contributed to exacerbating his spending. But I think I understand you to conceded that raising taxes has to accompany increased government spending. Such an increase stifles innovation. Why not skip the stifling and go right to increasing innovation? we should be cutting taxes, particularly in a downturn. But as they say, reasonable minds can disagree.

[BTW, it is you who claims I am an economist by virtue of my undergraduate degree.]

Typed way too fast there during my lunch break… apologies for the multitude of typos… FDR*, which exacerbated the effect of his spending on the economy*, We*… back to innovating.