A question-and-answer session with Alan Greenspan in the latest TIME magazine includes the following interesting exchange.
Is your book suggesting that the way out of the economic malaise is to cut social benefits?
No. Part of the way out is to slow down benefits. Very much to my surprise, benefits are crowding out savings of the society; the data are very clear in this regard.
And as John Hood reminds us frequently, “savings of the society” are critical for economic growth.
The Left argues that government should prop up aggregate demand by deficit-funded spending — on everything from schools and roads to unemployment insurance and Medicaid. The Left further argues that, because poor people tend to spend a higher percentage of their annual incomes than the wealthy, government should redistribute income to reduce overall savings and, thus, boost consumer demand.
Both the Center and the Right disagree with the Left. Instead of focusing on the demand side of the economy, they focus on supply. They argue that economic growth flows from effective investment in capital assets — in plants, equipment, infrastructure, ideas (intellectual capital), and better-educated, better-trained people (human capital). …
… While both the Center and Right can claim some empirical support for their views, the overwhelming majority of peer-reviewed studies show that government spending on consumption subsidies such as Medicaid is a net negative for economic growth, all other things being equal.
