More evidence

(Jack, MA in Political Economy from King’s College London in 2015 and is currently pursuing an MPP at George Mason University, “Six Arguments for More Federal Spending—And Why Each One Is Wrong,” pg online @ https://www.discoursemagazine.com/economics/2021/04/07/six-arguments-for-more-federal-spending-and-why-each-one-is-wrong/ //um-ef)

More importantly, there is the underlying assumption that large and oftentimes wasteful government spending is the only way to close the output gap. We know from the fiscal multiplier literature that government spending does not stimulate private spending and investment but actually crowds them out. Why, then, do so many economists jump in excitement at the idea of government stimulus closing the output gap? Past experience demonstrates that government spending doesn’t close the output gap. The U.S. had a large output gap in the early 1990s. By 1996 the output gap had been closed. Similarly, in the early 2000s, real output lagged behind potential output, but the gap was closed by 2005. It wasn’t government stimulus spending that closed the output gaps—actually, government spending as a share of GDP fell during these periods. Growth driven by the private sector is what closes output gaps, not government spending. False argument #5: We can reduce the deficit with tax increases, so more spending won’t add to the debt. In the real world that never happens. Before the election, President Biden’s plan was to spend an additional $11 trillion over the decade and hike taxes on corporations and high-income earners, which was estimated to reap between $2.1 trillion and $2.8 trillion in new revenue over the decade. In other words, for every $5 or $6 of additional spending, the administration would finance just $1 with new revenue; the remainder would go on the national credit card. But raising taxes even higher to cover the whole tab for new spending would be worse. A majority of studies find that tax increases reduce GDP by two or three times the increase in revenue. This explains why our own analysis reveals that cutting the debt-to-GDP ratio by cutting spending is much more successful than reducing debt by raising taxes, which often causes deep and long-lasting recessions. False argument #6: A high debt ratio means nothing—just look at Japan; it’s doing fine. Proponents of this argument are not making an apples-to-apples comparison—debt dynamics in Japan are very different from those in the U.S. Japan’s debt is 240% of its GDP, well over twice the U.S. ratio. But it’s traditionally had a very high savings rate, constituting about a third of its GDP, while the U.S. savings rate is about half of that—typically around 17% of GDP. In Japan, 90% of the nation’s debt is held domestically, reducing risks from international volatility, while U.S. debt held domestically has averaged less than 60% of total public debt since the Great Recession. Japan remains the world’s biggest creditor nation, while the U.S. is the biggest debtor. Additionally, Japan’s fiscal trajectory is hardly a model that others should be following. We know that debt crowds out investment and growth. While the U.S. has averaged real growth of 2.1% since 2000, Japan has averaged just 0.9% over the same period. Due to this lack of growth, wages have stagnated in Japan for the past two decades, while in the U.S. wages have continued to grow.