Government Spending Won’t Rescue Economy
- 8 February 2009 by Author 0 Comments
Government Spending Won’t Rescue Economy
By Richard Larsen
Published – Idaho State Journal, 02/08/2009
The need for economic stimulus is apparently a consensus in Washington today though how to provide it is heavily debated. President Obama has been pressing Congress for passage of his plan which is being presented as a measure to put a tourniquet on the hemorrhaging of private sector jobs and kick-start the economy. By most objective accounts, the $150 billion Bush stimulus of 2008 did little to stimulate economic activity, even though it placed $700 in most tax-payers, and non-taxpayers, hands. According to the Wall Street Journal, most stimulus check recipients used the checks to pay down debt, rather than engage in new spending to stimulate the economy.
We should learn a valuable lesson from the Japanese who struggled with an anemic economy from 1989 through 1999. Often called the “lost decade,” that ten year period featured eight massive “stimulus” spending programs by the Japanese government. None of the stimulus programs turned their economy around to get them growing again. What it did succeed in doing, however, was to turn a once thriving economy into one that may never fully recover from that decade of spending. Japan still struggles under the massive debt incurred from that period as their debt to GDP ratio still stands at 86%. If the congress approves this $1.1 trillion package (including interest) being debated in the Senate this week, U.S. debt to GDP ratio will stand at 68%. Taxes are the only way to pay off such debt, and taxes constitute one of the greatest deterrents to economic growth.
Thomas Jefferson declared, “Public debt is the greatest of the dangers to be feared.” The House version of the bill which passed last week is nothing more than a massive federal spending package. Over half of the $850 billion “stimulus” bill could be more correctly classified as discretionary spending. And after the interest is added in, the true cost ends up over $1.1 trillion according to the Wall Street Journal.
Let’s examine some of the items included in this “stimulus” bill. $4.1 billion is targeted to community action groups, like ACORN (Association of Community Organization for Reform Now). It also includes $650 million for digital TV coupons, $600 million for new cars for the federal government, $6 billion for colleges and universities, $50 million for the National Endowment of the Arts, $44 million to repair the U.S. Department of Agriculture headquarters, $200 million for the National Mall. And more inexplicably, the House bill includes $136 billion for 32 new government programs. Plus it adds spending to at least 150 different federal programs.
Many of those are worthy areas to consider funding through discretionary appropriation, but their inclusion in the “stimulus” plan, dilutes any potentially stimulative effect the plan may have on the nations’ economy.
More importantly, those projects only expand government spending, and do nothing to create a positive economic climate for creating permanent jobs in the private sector.
The Congressional Budget Office “scoring” of the stimulus package indicated that only 12 cents of every dollar would have a stimulative affect on the economy within the first 18 months. The scoring process has its faults, and is designed to be non-partisan, but in this case their results indicate the impotence of the bill for creating positive economic activity.
During the Depression era, we know that even with a tripling of federal government spending from 1931 through 1939, the U.S. was still in a dire depression, and unemployment was still over 17%. What snapped the country out of the economic doldrums was our involvement in World War II, which saw a dramatic increase in economic activity from the private sector because of high demand for everything from trucks and jeeps, to airplanes and bullets.
The Obama administration has been pressing for passage of the stimulus plan for improvement to our infrastructure and the jobs that would be created with a massive influx of spending to improve it. Regrettably, less than 10%, or only $63 billion of the House version of the stimulus plan was aimed at infrastructure investment, and only $30 billion specifically for roads and bridges. Yet even if the entire $850 billion was spent on infrastructure, while there would be an increase in jobs in construction and construction supplies, they would not be permanent jobs to the tune of 2.5 to 3 million jobs, as desired by the administration.
This is not a typical recession, and without something dramatic, it could easily deepen and last longer than the 10.5 months that U.S. recessions historically average. This one is worsened due to the erosion of real estate values, the number of home foreclosures, and the concomitant failure of many banks because of the mortgage meltdown.
So what will snap the U.S. out of its economic doldrums? Certainly not government spending. The great Nobel Laureate for economics, Milton Friedman, declared a couple of years ago, “unbridled government spending is the single greatest deterrent to faster economic growth in the United States today.” He’s probably rolling over in his grave as he observes the unprecedented spending spree the federal government is engaging in.
The best way to emerge from a recession is to free up capital, or money. Reduction of capital for investment and expansion, and reduced consumer spending are characteristic of recessions. While scoffed at by those who prefer government solutions, the best way to free up capital is to reduce the costs of capital. Forbes economists recommend making the capital gains tax cuts permanent, which would freeze them at 10%, and a 15-20% cut in corporate tax rates. Currently the U.S. has the second highest corporate tax rate in the world, only trailing Japan in that category. No wonder so many companies have been moving operations overseas, to escape the confiscatory taxes collected from companies domiciled domestically. By reducing the tax rates on corporations, companies have that much more of their net profit to reinvest in their companies for expansion, mergers, and increase manufacturing capacity. That translates to more jobs, and the kind of jobs that are more permanent than infrastructure-related construction jobs would be.
And to free up capital for all of us as consumers, the Forbes economists say that rather than send out a one-time stimulus check, what would be much more stimulative would be to declare a month or a quarter holiday from payroll taxes. These are the taxes that employers are required to withhold from their employees pay, as well as those that employers themselves pay which are directly related to employing a worker and are typically linked proportionally to an employee’s pay scale. Such a payroll tax holiday period would free up significant spending cash for everyone who pays taxes. If you are paid $4,000 gross per month, and your tax withholding shrinks that to $3,000 net per month, $1,000 would be freed up for every month the holiday is in force. Now that is change that even I can believe in.
There is a tendency for many Americans to hold corporations in contempt, especially the profitable ones. For example, Exxon Mobil posted record annual profits for 2008 of $45.2 billion. They anticipate maintaining their capital spending of nearly $30 billion next year, which is just less than half of the infrastructure spending of the House stimulus bill, yet the jobs created from that capital spending will most likely be permanent.
We don’t know yet what Exxon Mobil’s tax bill will be for this past year, but in 2007 Exxon Mobil paid $30 billion in total taxes on revenue of just over $40 billion in revenue. Corporations don’t technically pay taxes, people do. You and I paid the majority of that $30 billion that Exxon had to pay out in taxes. If corporate tax rates are lower, you and I pay less for their products and services, and the company is left with more capital to invest in their companies, creating jobs and expanding operations.
A statement released last week by 200 economists and printed in several major newspapers affirms these principles. The statement says in part, “More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.”
The Senate is still working on their version of a stimulus plan, and it may end up not resembling the House version very much. For the sake of our country and our future economic growth, let’s hope that it doesn’t.
Richard Larsen is President of Larsen Financial, a brokerage and financial planning firm in Pocatello, and is a graduate of Idaho State University with a BA in Political Science and History and former member of the Idaho State Journal Editorial Board. He can be reached at firstname.lastname@example.org.