The Most Expensive Research Project Ever
The truth is that, as Gary Becker puts it in a recent blog post, "The unpleasant fact we economists have to face is that there is not strong evidence on the actual effects of governmental spending on employment and GDP. The usual claimed effects are generally based on predictions from highly imperfect theoretical models of the economy rather than from strong direct and clear evidence on the employment consequences of different fiscal stimuli."
Which is one reason why, as Becker goes on to point out, the contrast between the current policies of the U.S. and the U.K. should be of considerable interest to economists. The U.S. policy, confidently predicated on the theory that deficit spending reduces unemployment, has been to greatly expand both spending and deficit relative to their long term levels, with spending up from about 20 percent of GNP to about 25 percent. The U.K., in contrast, is proposing to reduce its deficit, mainly by reductions in spending, by about 1.5% of GNP for each of the next four years; if they carry through, they will have cut spending, relative to GNP, by about as much as Obama and Bush have increased it. At the same time, Obama's fiscal policies are combined with a substantial increase in government involvement in economic affairs, most notably in health care, while Cameron is at least proposing a decrease.
There are, of course, lots of other differences between the U.S. and the U.K. But such a drastic difference in policy ought to produce results large enough to outweigh them. If the current position of the U.S. administration and its economists is correct, their policy should decrease unemployment by a substantial amount while the U.K. policy increases it by a comparable amount. If on the other hand, as I suspect, the U.S. recession has been so severe not despite Obama's policies but because of them, and similarly for the Great Depression and FDR, the prediction reverses. It will be interesting to see.
Economists should be grateful to President Obama and Prime Minister Cameron for arranging something reasonably close to a scientific experiment on the effects of government policy. Other people might look at the matter somewhat differently. Whichever of the two turns out to be wrong will have imposed a very large cost, quite possibly in the trillions of dollars, on the population he is experimenting on.
Which is the justification for the title of this post.
To be fair, there is a competing claimant to the title. One could view the communist states of the 20th century as a similar research project, this time on the effect of central economic planning. Seen from that point of view, measured in human cost and perhaps also measured in dollars, it was a still more expensive experiment.