Since 2008, we’ve had the largest macroeconomic “stimulus” since World War II, but the slowest economic recovery. The government’s stimulus has been much larger than just the $800 billion spending bill passed in 2009. In Keynesian theory, the stimulus has included a total of almost $5 trillion of federal deficit spending since 2008. Despite that colossal stimulus, we’ve had a horrible jobs market and very sluggish growth.
One reason that economists and policymakers are lousy at manipulating the short-run macroeconomy is that their models are so bad. In January 2008, the Congressional Budget Office forecast that the economy was strengthening and the growth rate was rising. In 2009, Obama economic adviser Christina Romer used her Keynesian model to infamously predict that the giant “stimulus” bill would quickly push the unemployment rate down.
If pumping up Keynesian “aggregate demand” hasn’t worked, what can policymakers do? They should focus on microeconomic reforms to spur growth over the long run.
They should reduce barriers to international trade and open the immigration doors to high-skill entrepreneurs. They should repeal damaging financial and health-care regulations. And they should privatize inefficient government activities, such as postal service, passenger rail, airports, seaports, and highways. Liberals say that they want more infrastructure spending — privatization is the way to get it.
The most important microeconomic reform would be to chop our 40 percent corporate-tax rate in half. Our high rate scares away international investment, especially given that the average global rate is now just 25 percent. Why would an automobile or computer company build a new plant here when they could go next door to Canada, which has a conservative government, stable finances, no threats of tax hikes, and a corporate-tax rate that is being cut to 25 percent?
Keynesians try to stimulate domestic demand, but today’s businesses can put their job-creating investments anywhere in the world to meet global demand. That’s one reason why focusing on microeconomic reforms to expand the supply side of the U.S. economy makes much more sense than all this macro manipulation.
This commentary is from a National Review Online symposium.