Tag Archives: spending

A Misunderstanding about (Government) Stimulus

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Dr Alan Blinder, in a recent op-ed in The Wall Street Journal, notes that

A debate now rages in Europe over whether fiscal austerity—that is, higher taxes and less spending—helps or hinders growth.  That’s progress of sorts.

He’s right as far as he goes, but then he goes on.

[A] similar debate rages here in the US—with the lone exception that our pro-austerity crowd abhors tax increases.

Here are the beginnings of Binder’s misunderstanding.  I don’t know of a pro-austerity crowd anywhere in the US, at least among Republicans and Tea Partiers.  These folks are plainly pro-growth, and that clearly demands less government spending—and lower taxes.  Contrary to Progressives’ beliefs, it isn’t the government’s money, and the government doesn’t need as much of it as it tries to claim from us in taxes.

…help state and local governments maintain their spending, which has now dropped 6.4% since its 2008 peak[.]

It doesn’t get any clearer than this.  Nor the Feds, nor the states, nor local governments need to “maintain their spending.”  All levels of government need to reduce spending and quit competing with the private sector for goods and services, quit buying for the private sector the goods and services it can—and should—buy for itself.  It’s through private sector economic activity that comes growth, and jobs, which fuel growth.  All government spending can do is substitute for private sector spending—at the expense of taking money out of the private sector to pay for that spending, either in taxes today or taxes tomorrow.

Many Democrats also want to build and repair more roads, bridges, tunnels and the like….  Most Republicans reject that idea, too….

This is just a cynical distortion of the Republicans’ position, and it’s disappointing to see in someone who’s supposed to be a reasonably objective academic.  The need to work on our physical infrastructure is  bipartisanly recognized.  What the Progressives’ programs do, though, and what the Republicans object to, is simply transfer funds to Progressive-favored state and local governments and to union allies.  Honest funding support, that will help—help, mind you, not cover entirely—with actual work, and which funding is itself covered by spending cuts elsewhere, will find Republican support.  Look, for instance, to the 20+ jobs bills the Republican House has passed and that are languishing in the Senate because Blinder’s Democrats won’t even permit them to be debated, much less come to a vote.

He does have some specific ideas:

  •  Budget policy. For openers, as I advocated in these pages last month, we need a two-pronged fiscal package.  In the near term, we need modest stimulus, focused tightly on creating jobs.  But that stimulus should be paired with a vastly larger dose of long-run deficit reduction—perhaps 10 to 20 times as large as the stimulus—over the 10-year budget window.

Economically, this can be done; it’s not even that hard. But if Republicans continue to reject even deals comprised of $10 of spending cuts for each $1 of tax increases, it’s hard to see how we get there politically.

I debunked this here.

  •  Private investment. Republicans are right that business investment is the key to growth. Fortunately, business investment has done very nicely, thank you, despite the sluggish economy—growing 8.4% over the past year and at an annual rate of 10.8% over the past two years.  (The corresponding growth rates for GDP were about 2%.)  So while there’s always room for improvement, business investment is not part of the problem.  The best thing policy can do for private investment is to get the overall economy growing faster.

Indeed.  And the best policy for achieving that is reduced government spending competition with the private sector, lower taxes, and reduced regulatory burden—which has exploded under the present administration.  The EPA’s rules are especially onerous, irrelevant to the economy, and job-destroying.  HHS’ regulations also attack private sector job growth, as well as such minor things as constitutionally protected religious freedom.

  •  Public investment. Unlike private investment, inadequate public investment is part of the problem.  America’s infrastructure needs are so huge, and so painfully obvious, that it’s mind-boggling we’re not investing more.  The U.S. government can now borrow for five years at about 0.75% and for 10 years at about 1.7%.  Both rates are far below expected inflation, making real interest rates sharply negative.  Yet legions of skilled construction workers remain unemployed while we drive our cars over pothole-laden roads and creaky bridges.  Does this make sense?

Public “investment” is, indeed, part of the problem.  “There’s a sale on! Let’s go buy!  Think how much we can save at these prices!”  Think how much more we can save, if we don’t buy at all.  The existence of a sale, whether it’s in a lower price for a good or a lower price for borrowing, is no excuse at all for spending—or borrowing.  Spending and borrowing must have a legitimate purpose, not merely be “cheap.”  All those nickels borrowed today add up to lots of dollars owed—and so taxed for—tomorrow.

Moreover, this administration poured nearly $1 trillion into stimulus—including no small part of infrastructure maintenance buildout and maintenance—in 2009, and it’s been pouring out more since, in the form of loan guarantees, among other routes, for “green” energy infrastructure, among other things.  What have we gotten for all that “investment?” Transfers to unions, transfers to states for their own payoffs, bankrupt “green” energy companies, but no actual infrastructure maintenance buildout or maintenance.  Does this make sense?

  •  Education. Everyone knows that the returns to education, while large, are long delayed.  That means we have no time to waste.  We should be doing a much better job of building a better educated, more productive work force for the future.  A Council on Foreign Relations task force co-chaired by former Secretary of State Condoleezza Rice and former New York City Schools Chancellor Joel Klein recently argued that better K-12 education is critical to American leadership in the world and therefore to our national security.

Indeed, again.  Government needs to stop driving up the cost of education by subsidizing it.  We as a society need to stop stigmatizing those who lack a college degree.  College is not for everyone.  Nor do those in the trades need a college degree; they need a decent VoTech source of education and training—the sort of thing we used to get in our high schools all those years ago, and that could be improved upon by our community colleges—many of which do fill this bill.

Why in the world are we still arguing about this?

Because the Democrats and their Do-Nothing Senate, and the President, are in the way.  If it’s Republican, it’s to be ignored.  It’s all Bush’s fault.  It’s racist.  Pick a Progressive excuse.

Which candidate does that remind you of?

In terms of not understanding the distinction between economic growth and government growth?  That’s pretty clear.

Food Stamps and Poverty

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John Hinderaker, at Power Line, notes that the Progressives in the Senate have voted down even a modest (some might say trivial) reduction in Federal spending on food stamps—using your tax money.  (Note, by the way, that 100% of the spending on food stamps is by the Feds; no state spends one red cent of state monies on these.)  The offered reductions were in the form of three  amendments, two put forward by Jeff Sessions (R, AL):

  • establish a federal asset test to ensure that food stamps aren’t going to families that may not have an income but have tens of thousands of dollars in savings or may even live in a million-dollar home
  • prevent states from waiving federal eligibility requirements for the program
  • eliminate the bonuses that the federal government now pays to states that deliberately swell the ranks of food stamp recipients.

The spending mandated by the Farm Bill to which these amendments were to be attached is shockingly weighted, as this graph shows: There are a couple of other aspects of this Progressive demand to spend your money on their food stamps.  Forty-six million Americans currently live below the poverty line as a result of President Obama’s failed economic and social welfare policies.  Thirty-nine states have no limits at all on the fiscal well-being of a family in determining that family’s eligibility for food stamps—anyone who applies qualifies—and twenty-eight states have limits that are more than 130% above the Federal Poverty Guideline (which differs in a trivial way from the Federal Poverty Threshold that the Census Bureau uses to determine the number of Americans living in poverty).

Of those 39 states (the full list can be seen in Table 1 of the Congressional Research Service’s “The Supplemental Nutrition Assistance Program: Categorical Eligibility“), California, Illinois, and New York alone account for 70.5 million Americans.

Under Federal law, which the Progressives have refused to alter in any meaningful way, vastly more Americans are eligible for food stamps than are actually living in poverty.  Food stamps no longer are a program to help the needy; they’re a program to get and keep Americans dependent on a Progressive-run government for their welfare.  They’re a Progressive Incumbency Welfare program.

More on the EU Crisis

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The Wall Street Journal asks whether, with the EU and the euro zone falling deeper into their pit, Germany will act.

Germany, the only euro-zone nation with the economic heft to do so, has done the minimum necessary to keep vulnerable countries afloat…

they say, and

[T]he German government must decide whether saving the euro is worth putting the country’s own prosperity at risk.

But Germany has been acting, and for the most part quite appropriately—that “minimum” being too much intervention.

No one can save us from ourselves, or the Greeks from themselves.  We—and the Greeks—are the only ones who can do this.  Indeed, “salvation” imposed from outside can only make the inevitable conflagration that much worse.  It does so, in part, by not allowing the natural forces, of a free market in this case, to clear away the dead brush as it accumulates, so that when an otherwise lesser recession succeeds in igniting that inflammable detritus in several areas, they all explode into an out of control disaster—the current EU debt crisis.

The imposed “salvation” also acts, in part, to create a moral hazard that anaesthetizes its victims against the pain of acting on one’s own obligations and suffering the consequences of choosing unwisely or unfortunately (and those of choosing wisely or fortunately) without eliminating the critical need.  And this results, in the other nations “needing” the same bailout, which series threatens to bankrupt the benefactors as well as the beneficiaries.  The beneficiaries of this “aid” will be bankrupted by it; have no doubt of this.  The recipients of the loans being forced can never hope to repay them, and this can only cost the taxpayers of the lending nations—taxpayers who have the wherewithal explicitly because they, and their nations, have been acting responsibility.

Germany, which the rest of Europe and especially the Greeks, sees as their piggy bank, recognizes this risk, at least sub rosa, as demonstrated by their reluctance to fork over the cash.  It’s time for the rest of Europe to man up, also.

As the WSJ notes,

At a conference in Brussels last week, Thomas Steffen, state secretary at the German finance ministry, responded to criticism that Germany had been too slow to help its neighbors by making reference to the fable of the ant and the grasshopper.  The ant, he noted, works through the summer to store up food for the winter while the grasshopper wastes the warm months singing.

Some in the audience took the analogy as a call on southern Europe to take their fate into their own hands.

Mr. Steffen didn’t tell audience members how the fable ends: When winter comes, the starving grasshopper begs the ant for food. Rebuking the grasshopper for his idleness, the ant turns his back and crawls away.

Those in the audience took the analogy correctly—knowing the outcome of the fable.  It’s time for the Greeces of the EU, in particular, take their fate into their own hands; it’s late summer, and the fall approaches.

The growth policies they need to emplace must not be the currently proposed—or forced from outside—policies of government growth through higher taxes (if with proclaimed spending cuts).  Rather, the growth policies must be policies of shrinking governments, greatly reduced government spending, and greatly reduced taxes.  And in the cases of some countries, actually collecting those taxes that are levied.  The social practice of not paying the taxes is a social practice of stealing from one’s neighbors.  If the tax is disliked so much, then the people of that polity must elect a government that will rescind that tax.

Déjà Vu All Over Again Cont’d

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In this post I continue a discussion of the advice to Reagan memo that The Wall Street Journal excerpted a few days ago.

On the matter of budgeting, the memo advised, in the context of fighting then-high inflation

Many question whether you are serious about a sizeable cut in budget outlays.  Credible FY 1981 and 1982 budgets which do that clearly and unambiguously would evoke an extraordinary response in the financial markets, and set the stage for a successful assault on inflation and a decline in mortgage and other interest rates.

This is sound advice for the next President, also.  Credible FY2013 (since the Progressives in the Senate and White House have variously refused to offer a serious budget or any budget at all for the last three years, a 2013 budget for the fiscal year then in progress will remain a necessity), FY2014, and FY2015 budgets will be as critical in demonstrating resolve in cutting irresponsible spending as it was in fighting inflation.  And it will be critical in reducing the impact of the inflation time bomb the Fed is creating, should that go off before it can be defused.

Those advisors continued in their section on the Budget:

Off-budget financing and government guarantees mount and expand programs through the use of the government’s borrowing capacity, draining the nation’s resources without being adequately recorded in the formal spending totals.

Pop quiz time: what off-budget financing and government guarantees are present today?  Bonus question: what does the continued existence of off-budget financing and government guarantees of any sort say about the sense of responsibility felt by incumbents of a Big Government?

The Reagan advisors also warn of this:

In addition, the mandating of private expenditures for government purposes has gained momentum as the spotlight has [i]lluminated direct spending. These mandates are also a clear call by government on the nation’s resources.

Boy, has it ever gained momentum.

Closely related to budgeting is tax policy.

Tax policy is properly the province of your Secretary of the Treasury.

Indeed.  And the inability of the present Treasury Secretary to pay his own taxes says far more about the unnecessary scope and complexity of current tax law than it does about his intelligence or sense of responsibility.  If we assume Geithner isn’t a tax scofflaw—and I believe he is a fundamentally honest man—his mistake should be a clarion call for simplification.  That it is not speaks poorly of the incumbents on both sides of the aisle.

Reagan’s advisors continue:

We consider that the key ingredients should be your proposals for the Kemp-Roth cut in personal income tax rates, simplification and liberalization of business depreciation and a cut in effective taxes on capital gains….  Consistent with your proposals earlier this year, the effective date for these reductions should be January 1, 1981.

Other key proposals are…reductions in…inheritance taxes and the taxation of Americans living abroad….

Again, these are remarkably prescient.  The Obama tax increase is set to take effect on January 1, 2013.  That increase, aside from raising income taxes on ordinary Americans smack in the middle of the present recession, will include jumps to usurious rates on what those same ordinary Americans would otherwise leave to their own children and other heirs of their choice—not of government’s choice.  Moreover, most sub-Federal jurisdictions only tax income earned within their jurisdiction.  Why should the Federal government be any different?

The Obama tax increase also includes major increases in business-related taxes: investment taxes on capital gains and increasing the double taxation present on dividend payouts.  These will serve only to reduce investment in American businesses, to the detriment of our already suffering economy.

I’ll have more in the coming days.

Déjà Vu All Over Again

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This post is taken from “Economic Strategy for the Reagan Administration,” a memo summarizing studies commissioned by candidate Ronald Reagan and delivered to President-elect Reagan on mid-November 1980, as summarized in The Wall Street Journal.  The memo began

Sharp change in present economic policy is an absolute necessity.  The problems of inflation and slow growth, of falling standards of living and declining productivity, of high government spending but an inadequate flow of funds for defense, of an almost endless litany of economic ills, large and small, are severe, they are not intractable.  Having been produced by government policy, they can be redressed by a change in policy.

Aside from the high inflation of 1980, that could have been written today.  Besides, the actual inflation then is a threatened inflation today, with the Fed’s policy of deliberately depressed interest rates and rapid printing of money coupled with the administration’s prolific spending.

You have identified in the campaign the key issues and lines of policy necessary to restore hope and confidence in a better economic future:

  • Reestablish stability in the purchasing power of the dollar.
  • Achieve a widely-shared prosperity through real growth in jobs, investment, and productivity.
  • Devote the resources needed for a strong defense, and accomplish the goal of releasing the creative forces of entrepreneurship, management, and labor by:
  • Restraining government spending.
  • Reducing the burden of taxation and regulation.
  • Conducting monetary policy in a steady manner, directed toward eliminating inflation.

This amounts to emphasis on fundamentals for the full four years, as the key to a flourishing economy.

Sound like what’s needed today?

The need for a long-term point of view is essential to allow for the time, the coherence, and the predictability so necessary for success. This long-term view is as important for day-to-day problem solving as for the making of large policy decisions.

This was true then, 50 years after the start of the New Deal, a 50-year period of spendthrift policies and high taxes, and it’s even truer today, 30 years farther down that road, with this administration’s effort to raise taxes on top of its already explosive spending and debt accumulation.  It’ll take a long time, and a long-term strategy is critical, to repair the damage.

The memo went on with sound advice concerning budgeting, tax policy, regulation, energy, and monetary policy—it could have been written for delivery to President-elect Mitt Romney in mid-November 2012.  And we can certainly hope both for President-elect Mitt Romney, and that he takes this advice to heart.  The incumbent certainly has already eschewed it.

I’ll more on the Reagan memo in the coming days.