What do John Taylor and Mark Zandi disagree about?
Mark Zandi says the GOP's proposed spending cuts will cost about 700,000 jobs. John Taylor says they will "increase economic growth and employment." Both are respected economists who immerse themselves in data, research and theory. So how can they disagree so sharply?
The dispute comes down to how much weight you give to "expectations" about future deficits. Taylor's argument is that Zandi's model -- which you can read more about here -- doesn't account for the upside of deficit reduction -- namely, that when the government spends less, the private sector will spend more. Taylor thinks individuals and businesses are hoarding their money because they're afraid of the high taxes, sharp spending cuts and assorted other nastiness that deficit reduction will eventually require. "The high unemployment we are experiencing now is due to low private investment rather than low government spending," he writes. "By reducing some uncertainty and the threats of exploding debt, the House spending proposal will encourage private investment."
Zandi doesn't buy it. "That kind of thinking does probably play some role," he says, "but I don't think it's broadly applicable to most of the population. And even for higher-income, wealthy households who would be particularly likely to respond like that, I'm having trouble seeing it. Most of the improvement in spending in recent years has come among those high-income groups."
For Zandi -- and others, such as Goldman Sachs, who agree with his basic model -- businesses aren't holding back because of deficits. They're holding back because sales are weak and they show little sign of getting stronger. And there's no reason to hire a new employee if sales aren't going to go up. If the public sector then fires a few hundred thousand workers, that doesn't mean more customers for businesses -- it means fewer. And that, in turn, means that they will expect lower sales and continue to hoard their cash.
Their dispute is empirical as well as theoretical. "The stimulus package of 2009 had no material positive effect on economic growth or employment," Taylor writes. Zandi couldn't disagree more: "The recession ended in precisely the same month that the stimulus spendout was at its maximum point, which was June of 2009," he says. "The stimulus ended the recession."
As readers might guess, I come down on Zandi's side of the argument. I've had a lot of trouble finding evidence -- or even a consistent articulation -- of the argument that policy or short-term deficit uncertainty has restrained private investment. At the same time, the spending cuts being pushed by the House GOP do much less to improve the deficit than the tax cuts being pushed by the House GOP do to worsen it -- but those are tax cuts that Taylor has long supported. Finally, we know what it looks like when public borrowing is crowding out private spending. And we're just not seeing it.
There's another question as to why Goldman Sachs and Mark Zandi are estimating that the GOP's spending cuts will do much more harm to the economy than Fed Chairman Ben Bernanke is -- but note that unlike Taylor, Bernanke agrees that the immediate effects of the spending cuts will be to reduce growth.
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