A Compelling Preview of Tonight's State of the Union Address

Amity Shlaes provides a compelling preview of the economic policy portion of tonight's State of the Union Address by President Obama. She examines the coming claim by the President that in today's trying economic times government spending continues to be necessary to create private sector jobs. Shlaes does us all a valuable service by providing a digest of economic research by economists as diverse as Robert Barro, Price Fishback and Valentina Kachanovskaya, Lee Ohanian, and Robert Higgs.

The work of these economists all point to the fact that government spending is actually a job killer, not a job creator. "The research," Shlaes concludes, " also tells us that the best thing President Obama can do to help unemployment drop on his watch is to eschew more plans for spending altogether."

On this point Shlaes agrees with me. I conclude the chapter on macroeconomic policy in my Foundations of Economics with the following:

Putting our faith in fiscal stimulus such as increased government spending is likewise foolish. Increased government spending must be financed somehow. Clearly, paying for it by increasing the money supply does more harm than good. Paying for it by increasing taxes reduces the ability and incentive to save and invest because taxation reduces disposal income. Financing increased government spending by borrowing takes otherwise productive capital out of the private economy and redirects it into the hands of bureaucrats who consume it according to their statist ends. All of this tends to promote capital consumption and hampers the capital accumulation process necessary for the economy to get back on the path to prosperity.