Washington’s response to the current recession illustrates one of the fundamental laws of political physics: The more we spend on our mistakes, the less willing we are to admit them.
The conventional wisdom is that if government can “inject” enough money into the economy, it can reverse the recession. Unfortunately, the hard and bitter truth is that government cannot inject a single dollar into the economy that it has not first taken out of that economy.
True, government takes a dollar from Peter and gives it to Paul. Paul has one dollar more to spend and that dollar will ripple through the economy. The problem is that Peter now has one less dollar to spend. On paper, it nets to zero.
In practice, it nets to much less than zero, because government is shifting massive amounts of capital away from investments that would have been based on economic calculations and toward investments based on political ones.
How else do you explain the $800 billion spending bill President Obama boasts will “save or create” up to 4 million new jobs? Put a pocket calculator to work on the president’s own numbers and you will discover it works out to a cost of $200,000 for every job he promises. Sending a $100,000 check to every one of those 4 million families would save $400 billion!
Of course, the government doesn’t have that money. Between our current deficit of $1.2 trillion and the $800 billion more about to be added, our national treasury will spend 2 trillion more dollars than it receives as revenue. That figure is 150 times the size of the annual deficit that has brought California to insolvency.
So the government must borrow that $2 trillion, or about $6,500 for every man woman and child in the nation. From where does it borrow? It will borrow from the same pool of funds that would otherwise have been available for loans to employers seeking to add jobs, or homebuyers seeking to buy homes (to stabilize falling housing prices), or consumers seeking to buy new cars and appliances (upon which two-thirds of our economic growth depends).
But that money now will not be there for consumers, homebuyers and employers to borrow to expand the economy because government will have borrowed it instead to expand government.
Indeed, if government spending actually stimulated the economy, America should now be enjoying a period of unprecedented economic expansion. The bailouts, stimulus spending and loan guarantees already approved over the past year total nearly $10 trillion. An economist recently noted that’s much more than the modern-day, inflation-adjusted cost of the New Deal, the Louisiana Purchase, the Space Race, the Vietnam War and the Marshall Plan combined.
We’ve not seen prosperity from this policy because this policy doesn’t work.
It didn’t work in Japan in the 1990s. The Japanese now refer to their folly as their “lost decade.” It didn’t work in America in the 1930s. The unemployment rate in 1939, after nearly a decade of New Deal spending, was the same as it was in 1931. And it hasn’t worked today.
Fortunately, we know what does work. Reducing the burdens on productivity increases productivity. America suffers the second-highest corporate tax rate in the industrialized world. Economists estimate that reducing taxes on productivity, as proposed by House Republicans, would produce twice the jobs at half the cost of the president’s new New Deal.
It worked when John F. Kennedy did it in the early 1960s, and it worked when Ronald Reagan did it in the 1980s.
How typical of government to reject policies that we know work in favor of policies we know don’t work. Of the czarist government, Leo Tolstoy wrote, “I sit on a man’s back, choking him and making him carry me, and yet assure myself and others that I am very sorry for him and wish to ease his lot by all possible means – except by getting off his back.”
No nation in history has ever spent its way to prosperity, but many have spent their way to economic ruin and collapse. It is the economy that needs stimulation, not government, and the best way to do so is to get off its back.