Chris Morris / Special to the Sun
Sunday, Aug. 22, 2010 | 2 a.m.
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With the economy looming as the 1,000-pound gorilla in voting booths this election, voters may be casting their ballots in the U.S. Senate race based not so much on the attraction of the candidate as the economic philosophy he or she embraces.
Senate Majority Leader Harry Reid, the Democrat, believes government should step in and spend taxpayer money to keep the economy afloat, create jobs and reinvigorate commerce. Most mainstream economists credit this “Keynesian” approach with sparing the nation an even deeper recession during the past three years.
Sharron Angle, the Republican, favors a laissez-faire, free-market approach in which government wouldn’t directly intervene to save or create jobs. Angle’s “Chicago School” philosophy maintains that an unfettered market, coupled with government spending cuts and tax breaks, would allow the listing economy to right itself.
Economists have disagreed for almost 100 years on the best economic approach during a recession. Although most favor Keynesian intervention, it’s far from unanimous.
“The difficulty is, it’s a political question,” said Roberton Williams, a senior fellow at the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution. “There’s no strong economic argument to say do one thing or another. Individuals can rely on the private sector to do everything with a very small government that provides minimal services. Or you could go the opposite route where you have cradle-to-grave government involved in your life. In principle, you could go either way and have the economy function just as well.”
As voters head to the polls, part of their decision will be to decide how hands-on they want their government to be in addressing the recession.
The Keynesian school of thought, named after British economist John Maynard Keynes, maintains that during times of recession, governments should go into debt if needed to stimulate spending, and that short-term losses make for long-term gains. Based on the premise that capitalists will always look for free-market benefits that could prevent a balancing of the economy, Keynesians believe it’s the government’s job to spend the money consumers won’t to create a need for supplies, a need for jobs and price stability.
On the other end of the spectrum is the Chicago School, named for the University of Chicago Economics Department, whose faculty included Nobel Prize winner Milton Friedman, where a more libertarian approach has dominated. These economists believe that government regulation creates monopolies, the free market can better allocate resources, and governments should focus on curbing debt rather than trying to manage economic demand.
Reid’s economic policies — the federal stimulus, tax incentives for businesses to hire unemployed workers, extended benefits for people laid off — have largely been spending-based, landing him in the Keynesian camp. They have cost taxpayers billions of dollars, but they have worked. A White House analysis found that almost 30,000 jobs have been created in Nevada because of stimulus funding. Ninety-five percent of workers received tax breaks.
“Is it helping the economy recover from the recession faster than it would otherwise? I would say yes,” said Gary Burtless, a senior fellow in economic studies at the Brookings Institution.
Burtless noted that stimulus spending isn’t a Democratic idea. Republican President George W. Bush signed a small stimulus package in 2008.
Angle has recently begun fleshing out her position on economic policy.
She believes a substantial reduction in the federal debt and deficit would increase business confidence. She supports making the Bush tax cuts permanent to keep more money in the private sector. She wants to eliminate regulations that make doing business more expensive, naming the recently passed health care legislation as her top priority for repeal.
During the primary campaign, she said she would eliminate the Education and Energy departments, as well as the Environmental Protection Agency. She now proposes reducing their budgets by 5 percent per year for five years, then reassessing her plan to eliminate them.
In a New York Times interview, Angle denounced Keynesian economics and praised Ronald Reagan’s supply-side approach. Reagan slashed regulations and diverted government spending from social programs and toward the military. And he aggressively used monetary policy to rein in inflation.
But Burtless noted that national debt tripled under Reagan and unemployment soared to its highest level in almost 50 years.
Angle spokesman Jarrod Agen said she will continue to develop her positions on the economy and plans to release detailed policy descriptions in coming weeks.
A consensus exists among economists that three areas of government intervention helped rescue the American economy when the recession hit in late 2007. First, the Troubled Asset Relief Program, or TARP, rescued the financial industry from the brink of collapse. Second, the $787 billion stimulus put cash in the hands of Americans and created jobs that wouldn’t otherwise be there. Third, the bank stress tests and the Federal Reserve Board’s decision to buy billions of dollars worth of private assets and to keep interest rates low, further stabilized the economy.
Angle strongly opposed TARP and the stimulus.
Economists Mark Zandi, chief economist for Moody’s Analytics, and Alan Blinder, a Princeton University professor, studied the effects for a paper published by Moody’s Economy.com, concluding that, although the effectiveness of individual programs can be questioned, the government’s overall response brought an end to the Great Recession.
“While all of these questions deserve careful consideration, it is clear that laissez faire was not an option; policymakers had to act,” they wrote. “Not responding would have left both the economy and the government’s fiscal situation in far graver condition.”
Without federal intervention, the national unemployment rate would now hover near 16 percent and the country would have 8.5 million fewer jobs, Zandi and Blinder found.
Not everyone agrees.
Chicago-School and libertarian economists argue that government intervention has simply prolonged economic suffering by interfering with the economy’s inherent ability to right itself.
Dan Mitchell, a senior fellow at the Cato Institute, a libertarian think tank in Washington, said history has proved Keynesian economics impedes economic growth. Echoing Angle, Mitchell said such intervention failed to work in the 1930s and 1940s.
He also points to Germany’s recent austerity measures, which he says promoted economic growth there, and Japan’s stagnation after massive government stimulus measures were attempted in the 1990s.
“It’s basically a crock,” he said of the work by Blinder and Zandi.
Favoring data and facts, instead of ideology, is key to crafting sound economic policy, argued Elliott Parker, an economist at UNR. The government should respond to changing economic conditions, he said.
“All ideologies basically are wrong because all are oversimplifications,” Parker said. “They are not fact-based and ... the result is, you get very bad policy.”
Parker agrees government intervention was key to rescuing the American economy from the recession. But he said that intervention must be short-lived and the debt must be addressed as the economy rebounds.