In the first article in this two part series we disproved two long standing myths and lies that the political class has constantly perpetuated, namely that the so-called Bush tax cuts for the rich caused all of the economic trauma and skyrocketing deficits over the past few years and that Social Security is a far better and safer retirement alternative compared to letting people invest their money for retirement the way they want to invest it. Two myths down, a two more to go.
Myth #3 – Government Spending Can Efficiently and Effectively Stimulate The Economy
The next myth that needs to be put to rest is the myth that government spending is an effective way to stimulate the economy and create real jobs. This is a timely topic as the nation continues to struggle with very high unemployment (about 10%) and sluggish economic growth. The Obama administration launched their stimulus economic program last year and some in the political class are calling for another shot of stimulus spending since we are still in the economic doldrums.
But did the first stimulus package to any good? You can obviously make the case that it did not since unemployment is still so high, with over 14 million Americans still out of work. A vast majority of the 5% or so economic (GDP) growth in the fourth quarter of 2009 can be proven to be from the temporary jolt of government stimulus, and deficit spending, spending that has resulted in no long lasting effect as economic growth has fallen off throughout 2010.
Furthermore, the Obama administration claimed in October, 2009 that the stimulus plan had created or saved 650,000 jobs. It also reported that 0 billion of the stimulus funding had been spent. If you do the simple calculation, using only Obama’s numbers, you see that each of the jobs created/saved cost about 7,000 each to be created or saved. You cannot reduce unemployment through stimulus spending if it costs over a quarter million dollars to create or save one job that likely pays significantly less than that.
The sad truth that most in the political class do not understand or do not want to understand is that stimulus spending is an ineffective and inefficient way to spur the economy. It does not create jobs, it creates short term work, work that usually vanishes once the stimulus spending is gone, as illustrated by the decline in economic growth over the past year or so once the stimulus was spent. Governments cannot create wealth, they only can take wealth (via taxation) and redistribute it, usually less effectively than the free market. If that wealth had not been taken as taxes, it would have still entered the economy but would have entered the economy via individual citizens making individual choices. All the stimulus spending did was move around the money that was spent, it was not incremental spending to the economy.
A perfect counter example to this myth is what happened at the end of World War II. Consider the following information, mostly gathered from official U.S. government sources The first number is the year, the second number is Federal budget in millions of dollars, the third number is the unemployment rate and the fourth number is the GDP in billions of dollars:
1940: 68, 14.6%,1.4
1941:653, 9.9%, 6.7
1942: 137, 4.7%, 1.9
1943: 555, 1.9%, 8.6
1944: 304, 1.2%, 9.8
1945: 712, 1.9%, 3.0
1946: 232, 3.9%, 2.2
1947: 496, 3.9%, 4.1
1948: 764, 3.8%, 9.1
1949: 835, 5.9%, 7.2
1950: 562, 5.3%, 3.7
1951: 514, 3.3%, 9.3
Combine these facts with the facts that in 1945 there were, conservatively, about 10 million members of the armed services coming home to start civilian life and jobs (about 7% of the overall U.S. population). Did the U.S. government implement a stimulus spending program, significantly growing the deficit in order to create jobs for these returning members of the armed forces? It does not appear so from the above numbers:
- From a wartime high of about billion in 1945, the Federal budget was reduced by about 40% in just one year in 1946 (from billion to billion)
- By 1948, just three years after the war ended, the Federal budget and spending was under billion or almost 68% smaller than it was in 1945.
- However, despite these drastic cuts in Federal spending and about 7% of the population coming home to look for a job, the average unemployment rate for the six years immediately after the war was about 4.4%, a level that the Obama administration would kill for today.
- 7% of today’s U.S. population equates to the creation of enough jobs for over 20 million Americans, enough to keep today’s unemployment rate well under 5%.
- During the same time period, overall economic growth increased year over year for all but one year of the six years after the war and the U.S. government ran a budget surplus in four of the six years after the war (not on the chart).
Let’s review what happened after World War II – despite a massive influx of new people into the economy and the draconian reduction in Federal government spending immediately after the war ended, unemployment levels stayed low, the economy grew robustly, and the Federal government enjoyed budget surpluses for several years (four out of six) immediately after the war. No stimulus programs, no Cash For Clunker disasters, no skyrocketing national debt, minimal deficit spending. All of the things that the political class is doing to day that are not working, the government in the 1940s did the opposite of and it worked beautifully.
Kind of reminds of the old Seinfeld episode where George Costanza does the exact opposite of what he has been doing because that behavior has always resulted in failure. Maybe the political class should learn a lesson from George and our analysis above: lose the myth that government stimulus spending actually works. When you start to look like George Costanza, you have a big problem, political class.
Let Americans keep most of their hard earned wealth, to spend it freely and personally how they want to spend it. They showed in the 1940s that their spending it on what they want and need is the surest way and most efficient way to grow the economy. America came out of the war a healthy, robust nation with the strongest and freest economy in the world without any government stimulus spending.
Myth #4 – We Have Skyrocketing National Debt Because The Government Does Not Collect Enough Taxes From Americans
So far we have proven that 1) the so-called Bush tax cuts for the rich were not the determining factor in the skyrocketing deficits, 2) that Social Security is really a scam and that the free market would have been a much better investment alternative for most Americans over the years, and 3) economic stimulus spending is a cruel joke that only moves money around in the economy and does not create wealth or real jobs.
The final myth to be killed in this two part series is the falsehood coming from the political class which says taxes must be raised in order to tame our deficit problem, i.e. the government has not collected enough taxes and that is what is causing the deficit to balloon. Of course, since this is a myth, nothing could be further from the truth. The basis of this fourth myth analysis is a great article at the Heritage Foundation website written by Brian M. Riedl entitled, “The Three Biggest Myths About Tax Cuts and The Budget Deficit.” He frames this myth as follows: “Declining revenues are driving future deficits.” In other words, in his opinion, it is a myth that the deficits are caused by the government not collecting enough taxes.
To prove this point, Mr. Riedl does a simple analysis where he takes three economic data series from 1960 to 2020 (estimated from 2010 to 2020 as proposed in current government budget documents) and divides two of the series by the third to create two ratio streams. The denominator is the country’s annual GDP and the two numerator series are the amount of money that the government spent every year and the amount of money that the government collected in taxes and fees every year. From 1960 to 2009, the ratio of government spending to GDP averaged 20.3% and the ratio of government revenues to GDP was 18.0%.
The spending to GDP ratio was generally under the long term average from the 1960s to the late 1970s and from about 1985 until about 2007 and above the long term average from about 1980 to about 1984. The key point to remember is that for most of the Bush administration, the long term spending to GDP ratio was below the long term average. The revenue to GDP ratio bounced around the average of 18.0% throughout the entire period. It is expected to stay around the long term average through the year 2020.
While the revenue ratio stayed around the long term average through the past ten years or so, the spending to GDP ratio has skyrocketed since Obama took office, rising to around 25% in 2009, 2010 and 2011 (estimated) before expecting to decline to about 23% and then constantly rising until it hits an astronomical 26.5% in 2020. Thus, according to this simple ratio analysis, it is the large run up in spending, relative to the GDP of the nation, that is causing the deficits, not the fact that the government does not collect enough in taxes. That ratio has remained relatively stable for the past fifty years.
Mr. Riedl does a further analysis, determining that government spending for just Social Security, Medicare, Medicaid, and interest on our national debt will jump from about .6 TRILLION a year to an annual average of .5 TRILLION a year. Since the Federal government is currently collecting about .1 TRILLION in 2010 to fund the entire Federal budget, tax collections would have to increase 66% just to cover these four budget items in the next decade. Other government costs such as defense, student loans, Federal employee salaries, etc. would also have to be paid for with additional taxes.
Consider another example. Since the current Federal budget is about .5 TRILLION, if we keep all other expenses flat and added in the extra .9 TRILLION a year from the increase costs of these four line items, the total annual Federal budget would become .4 TRILLION. In order to keep this level of expense at the long term average of 20.3%, the U.S. economy would have to grow from its current size of about TRILLION to over TRILLION within a few years. This is not going to happen.
Thus, myth disproved. It is not insufficient tax collection driving the deficit, it is sky high government and political class spending driving the deficit, primarily in the four categories o Social Security, Medicare, Medicaid, and interest payments. There is not enough revenue and wealth that could be taxed out of American citizens to overcome this outlandish spending. Which makes it critical that numerous steps be implemented as soon as possible to tame the wild increase in government spending:
- Start reducing Federal government expenditures across the board by 10% a year for at least five years, using the savings to start paying down existing national and providing tax relief and a true economic stimulus to the country’s taxpayers.
- Funnel some of these expense savings into the three or four most deadly diseases facing the country today in order to reduce Medicare, Medicaid, and overall medical spending.
- Start fixing Social Security finances immediately including raising the retirement age to at least 70.
- Convene a panel of experts, a panel which excludes all politicians and lobbyists, to determine the underlying root causes of escalating health care costs in this country and implement a plan to attack these root causes, dumping the ineffective and prohibitively expensive Obama Care reform legislation.
- Implement term limits for all Congressional members in order to remove the stigma of making the hard economic decisions required to reduce government spending.
Thanks to Mr. Riedl and the Heritage Foundation for helping us destroy this myth. Now that the four myths are destroyed, it is time to start dealing with reality and start putting plans in place that might actually take reality into consideration and actually succeed in putting our economic house in order.
