Democrat Economic Policies Doomed to Failure

This is an article by Brian Riedl (National Review), it was so good I had to post it.

"Conservatives have correctly declared [the economic stimulus policy of the democrats and President Obama] a flop. [...] Yet few have explained correctly why the stimulus failed. By blaming the slow pace of stimulus spending, many conservatives have accepted the premise that government spending stimulates the economy. [...]"

"In 1939, after a doubling of federal spending failed to relieve the Great Depression, Treasury Secretary Henry Morgenthau said that 'we have tried spending money. We are spending more than we have ever spent before and it does not work...After eight years of this administration we have just as much unemployment as when we started...and an enourmous debt to boot.' Japan made the same mistake in the 1990's (building the largest government debt in the industrial world), and the USA is making it today."

"This repeated failure has nothing to do with the pace or type of spending. Rather, the problem is found in the oft-repeated Keynesian myth that deficit spending injects new dollars into the economy, thereby increasing demand and spurring economic growth. According to this theory, government spending adds money to the economy, taxes remove money, and the budget deficit represents net new dollars injected. Therefore, it scarecely matters how the dollars are spent. John Maynard Keynes famously asserted that a government program paying people to dig and then refill ditches would provide new income for those workers to spend and circulate through the economy, creating even more jobs and income. Today, lawmakers cling to estimates by Mark Zandi of Economy.com that on average $1 in new deficit spending expands the economy by roughly $1.50. If that were true, the record $1,600,000,000,000 deficit spending over the past fiscal year would have already overheated the economy. Yet despite this spending, which is equal to fully 9% of GDP, the economy is expected to shrink by at least 3% this fiscal year. If the spending constitutes an injection of 'new money' into the economy, we may conclude that, without it, the economy would contract 12%, hardly a plausible claim.

If $1,600,000,000,000 in deficit spending failed to slow the economy's slide, there is no reason to believe that adding $185,000,000,000 - the 2009 portion of the stimulus bill - will suddenly do the trick. But if budget deficits of nearly $2 trillion are insufficient stimulus, how much would be enough? $3 trillion? $4 trillion?

This is no longer a theoretical exercise. The idea that increased deficit spending can cure recessions has been tested, and it has failed. If growing the economy were as simple as expanding government spending and deficits, then Italy, France, and Germany would be the global economic kings. And there would be no reason to stop at $787 billion: Congress could guarantee unlimited prosperity by endlessly borrowing and spending trillions of dollars.

The simple reason government spending fails to end recessions is that Congress does not have a vault of money waiting to be distributed. Every dollar Congress 'injects' into the economy must first be borrowed or taxed out of the economy. No new income, and therefore no new demand, is created. They are merely redistributed from one group of people to another. Congress cannot create new purchasing power out of thin air.

This is intuitively clear in the case of funding new spending with new taxes. Yet funding new spending with new borrowing is also pure redistribution, since the investors who lend Washington the money will have that much less to invest in the economy. The fact that borrowed funds (unlike taxes) must later be repaid by the government makes them no less of a zero-sum transfer today.

Even during recessions, when total production falls, leaving people with less income to spend, Congress cannot create new demand and income. Any government spending that increases production at factories and puts unemployed individuals to work will be financed by removing funds (and thus idling resources) elsewhere in the economy. This is true whether the unemployment rate is 5% or 50%.

For example, many lawmakers claim that every $1 billion in highway stimulus will create 47,576 new construction jobs. But Congress must first borrow that $1 billion out of the private economy, which will then lose a roughly equivalent number of jobs. As transportation-policy expert Ronald Utt has explained, 'the only way that $1 billion of new highway spending can create 47,576 new jos is if the $1 billion appears out of nowhere as if it were manna from heaven.' Removing water from one end of a swimming pool and dumping it in the other end will not raise the overall water level. Similarly, moving dollars from one part of the economy to the other will not expand the economy. Not even in the short run.

Consider a simpler example. Under normal circumstances, a family might put its $1000 savings in a CD at the local bank. The bank would then lend that $1000 to the local hardware store. This would have the effect of recycling that spending around the town, supporting local jobs. Now suppose that, induced by an offer of higher interest rates, the family instead buys a $1000 government bond that funds the stimulus bill. Washington spends that $1000 in a different town, creating jobs there instead. The stimulus bill has changed only the location of the spending.

The mistaken view of fiscal stimulus persists because we can easily see the people put to work with government funds. We don't see the jobs that would have been created elsewhere in the economy with those same dollars had they not been lent to Washington.

In his 1848 essay 'What is Seen and What is Not Seen', French economist Frederic Bastiat termed this the 'broken window' fallacy, in reference to a local myth that breaking windows would stimulate the economy by creating window repair jobs. Today, the broken window fallacy explains why thousands of new stimulus jobs are not improving the total employment picture.

Keynesian economists counter that redistribution can increase demand if the money is transferred from savers to spenders. Yet this 'idle savings' theory assumes that savings fall out of the economy, which clearly is not the case. Nearly all individuals and businesses invest their savings or put it in banks (which in turn invest it or lend it out), so the money is still being spent somewhere in the economy. Even in this recession, with tightened lending standards, banks are performing their traditional role of intermediating between those who have savings and those who need to borrow. They are not building extensive basement vaults to hoard cash.

Since the financial system transfers savings into investment spending, the only savings that drop out of the economy are those dollars literally hoarded in matresses and safes - and there is no evidence that this is occurring en masse. And even if individuals, businesses, and banks did distrust the financial system enough to hoard their dollars, why would they suddenly lend them to the government to finance a stimulus bill?

Once the idle-savings theory collapses, so does all the intellectual support for government spending as stimulus. If there are no idle savings to acquire, then the government is merely borrowing purchasing power from one part of the economy and moving it into another part of the economy. Washington becomes nothing more than a pricey middleman, redistributing existing demand.

Even foreign borrowing is no free lunch. Before China can lend us dollars, it must acquire them from us. This requires either attracting American investment or raising the Chinese trade surplus (and the American trade deficit). The balance of payments between America and other nations must eventually net out to zero, which means government spending funded from foreign borrowing is zero-sum.

I've purposely ignored the Federal Reserve, which actually can inject cash into the economy, but not in a way that constitutes stimulus. Congress can deficit-spend, Treasury can finance the deficit spending by issuing bonds, and the Federal Reserve can buy those bonds by printing money. Any economic boost is then due to the Federal Reserve's actions, not the deficit spending - and of course the Federal Reserve will have to raise interest rates, slowing the economy again, to bring the resulting inflation under control.

If government spending doesn't cause economic growth, what does? Growth happens when more goods and services are produced, and the only true source of this is an expanding labor force combined with high productivity. High productivity in turn requires educated and motivated workers, advanced technology, adequate infrastructure, physical capital such as factories and tools, and the rule of law.

Government spending could boost long-run produtivity through investments in education and infrastructure - but only if politicians could target those investments better than the private sector would. And it turns out that politicians cannot outsmart the marketplace. Mountains of academic studies show that government spending generally reduces long term productivity.

The only policy proven to increase productivity in the short term is to lower tax rates and reduce regulation. Businesses can grow only through consistent investment and an expanding, skilled workforce. Cutting marginal tax rates promotes these conditions, by creating incentives to work, save, and invest.

It's happened before. In 1981, President Reagan inherited an economy stagnating under the weight of 70% marginal income-tax rates. Under Reagan, the top rate fell to 28%, and the subsequent surge in investment and labor supply created the strongest 25-year economic boom in American history.

Such tax-rate reductions are superior to tax rebates designed to 'put money in people's pockets'. Rebates - like government spending - simply redistribute existing dollars. They don't increase productivity because they don't change incentives: no one has to work, save, or invest more to get a tax rebate. The 2001 and 2008 rebates failed because Congress borrowed money from investors and foreigners and redistributed it to families. Not surprisingly, any new personal consumption spending was matched by corresponding declines in investment spending and net exports, and the economy was stagnant.

Congress can only redistribute exisitng demand, it cannot create new demand. [...] The more serious, long-term danger is that President Obama's Europeanization of the economy will bring the same slow growth, stagnant wages, job losses, high taxes, and lack of competitiveness that have plagued Western Europe, leaving the USA at an ever-growing disadvantage with Asian countries not so afflicted.

[Conservatives and free-market supporters - Republicans - must be elected into Congress to put the brakes on the deficit spending and high taxation, and return the money to the private sector where it can grow the economy and improve our standard of living.]

Joe Wilson said "You Lie", and he was right.

This is an excerpt from Ralph Reed's commentary on Sept. 13, 2009. Although shouting out in the middle of a speech is poor manners, our Congress is still fantastically proper relative to legislatures such as those in South Korea or Great Britain. Joe Wilson did, however, make a correct statement.

"[...] Consider just a few of the dishonest statements in Obama's speech:

First: He said "I will not sign a plan that adds one dime to our deficits - either now or in the future." If so, then the President should have announced his public opposition to the Senate leadership bill and HB3200 months ago [the democrat health care plan]. In June the Congressional Budget Office found that the legislation would increase the budget deficit by $240,000,000,000 over the next 10 years. That's just the beginning. A new study by the Lewin Group finds that in the second 10 years, it will increase the deficit by $1,000,000,000,000. The White House has publicly praised and supported both [democrat] bills. So Obama stated a whopping $1,240,000,000,000 falsehood.

Second: [President] Obama said he would not cut Medicare and affect basic care for seniors. But the Obama plan includes $600,000,000,000 in UNSPECIFIED Medicare cuts. It destroys Medicare Advantage with $250,000,000,000 in cuts, decimating a pro-consumer option that 25% of seniors [use] and allows them to choose the best insurance and doctor for them. Even the Associated Press [dominated by democrat reporters] has called Obama on this lie. AP reported that "although wasteful spending in Medicare is widely acknowledged, many experts believe some seniors almost certainly would see reduced benefits from the cuts. That's particularly true for the 25% of Medicare users covered through Medicare Advantage.

Third: [President] Obama said that Sarah Palin and others have claimed that "we plan to set up panels of bureaucrats with the power to kill off senior citizens." [...] What critics have pointed out is that seniors will be required to submit regularly to "end of life" counseling sessions (page 425 of HB3200) that, combined with cost controls and rationing of care, could lead to them being denied life-saving treatment. As healthcare expert Betsy McCaughy, chairwoman of the Committee to Reduce Infection Deaths, has pointed out, the bill includes "substantial funding for "comparative effectiveness research" which is generally code for limiting care based on a patient's age. Economists are familiar with the formula, where the cost of treatment is divided by the number of years (called QUALYs, or quality adjusted life years) that the patient is likely to benefit.

Fourth: [President] Obama claimed that the bill does not use taxpayer funds for abortion. This is also false. The Democrats rejected amendments in the House committee that would have specifically excluded abortion from coverage under the so-called government option. In its place, Democrats took the private portion of the premium (not the public subsidy) and specified that only those funds could be used for abortion services. This is an accounting gimmick. The fact is that abortion will be massively subsidized with billions of dollars in taxpayer funds for the first time in US history.

Fifth: [President] Obama claimed that his plan did not provide care for illegal immigrants. Here again, false. By rejecting a Republican amendment requiring proof of legal residence prior to receiving care under the government-run plan, the Democrats have opened the door for non-citizens and non-legal residents to receive care for which they have not paid into the system. If one refuses to require proof of citizenship or legal residence, one cannot claim to limit benefits to only USA citizens. [wait times and costs increase with increses in demand from illegals].

Healthcare services and industries should not be managed by the federal government. This is a mistake that our kids and grandkids will pay for if this democrat plan goes through and is not sunset by the next republican Congress.