Conservatively Speaking

It's true, the economy is recovering

Posted by Mary Lazich on Aug. 18, 2010 | 3 comments

Economy

The future of the economy is looking brighter. The economy is expanding. Economists are predicting an increase in growth.  The construction industry is bouncing back. So are investments in machinery and equipment.

The above is true. However, the pleasant economic outlook is permeating, not through America. Optimism instead is being felt in Britain and Germany.

Allan Meltzer, professor of economics at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute submits the economic turnaround in Europe is a direct result of announced plans to reduce spending. Meltzer writes in the Wall Street Journal:

“President Obama is the victim of bad advice and misinformation. From his advisers, the Democratic caucus and the New York Times, he hears that markets have failed and the country needs more government spending to increase consumer spending. He is told that any plan to reduce government spending and the deficit will bring on another recession and even a new Great Depression. And he repeats the foolish claim that, since the rich spend a much smaller proportion of their incomes, it is good for the country to raise their tax rates.

Nonsense. After Britain's new government announced a multiyear program to reduce government spending, the pound rose against the dollar and the economy continues to expand across the board.

In the euro area, Germany has reduced the growth of government spending to bring down the budget deficit. Following the recent announcement of a credible, long-term German program to reduce future deficits, the euro appreciated strongly against the dollar. Forecasters expect a surge in second-quarter growth when it is reported later this month. A rebound in construction and investment in machinery and equipment shows renewed optimism.”

Meltzer makes the case that the Obama administration should mirror the spending reductions in Europe rather than push another wasteful stimulus package.

In the private sector, businesses attempt to protect themselves from inevitable rising costs of health care and worker benefits by increasing labor-saving capital. Unfortunately, that means layoffs. What can the public sector do? Meltzer suggests putting a stop to new regulations on the private sector.

I appreciate this Meltzer line:

“People are not dumb beasts. Told that the government will spend more, many will expect to pay higher taxes in the future.”

Meltzer says Europe has jumped off the Keynesian bus. America needs to hop as well, and soon.

You can read Meltzer’s entire column here.