March 6, 2013

MICHAEL BARONE: Spending cuts may be answer to slow economic growth.

Is new-normal, slow growth inevitable? Even if you accept Cowen’s argument that productivity-enhancing innovation occurs sporadically, can’t America do better than it has in the past five (or, if you like, dozen) years?

Barack Obama has been trying to stimulate the economy with record-high government spending funded by higher tax rates and Fed Chairman Ben Bernanke’s low interest rates.

But as Stanford economist Michael Boskin points out in the Wall Street Journal, “Japan tried that, to little effect, in the 1990s.” Slow growth has become the new normal there.

There are alternative policies. One is to cut government spending, or cut it more than you raise taxes. As Boskin points out, the Netherlands in the mid-1990s and Sweden in the mid-2000s “stabilized their budgets without recession [with] $5-$6 of actual spending cuts per dollar of tax hikes.”

And he notes that Canada reduced government spending in the mid-1990s and early 2000s by an amount equal to 8 percent of gross domestic product.

Those cuts weren’t painless, but they put Canada on a trajectory different from ours. Canadian voters value budget surpluses, and Canada managed to avoid almost all the bad effects of the 2007-09 recession.

Read the whole thing.