Paul Krugman, writing for The New York Times, takes issue with an Op-Ed by Edward Lazear that appeared recently in The Wall Street Journal. Lazear...
Paul Krugman, writing for The New York Times, takes issue with an Op-Ed by Edward Lazear that appeared recently in The Wall Street Journal. Lazear is a member of the advisory board of the George W. Bush Institute, and chairman of the board of overseers of the Becker Friedman Institute at the University of Chicago. In his blog, Krugman defends broader government spending as a method for boosting growth. Yet too much emphasis on government stimuli neglects the ample evidence that smaller government is good for growth. In his Op-Ed, Lazear mentions the economists Andreas Bergh and Magnus Henrekson who find that an increase in the size of government relative to GDP by 10 percentage points is associated with a half to one full percentage point decrease in the annual growth rate of a country. Bergh and Henrekson's analysis ranges over a wide period. In U.S. history, there have been a number of moments when strong growth followed budget cuts, as the Bush Center's Amity Shlaes has noted in several articles. One instance was in the 1920s, when the federal government cut the budget in half. More than five years of strong growth followed. Yes, there was an intervening recession, that of the early 1920s. It was sharp, but so short almost no one remembers it.
