The President-elect’s Keynesian extravaganza won’t get the economy booming again.
In the 1980s, Reaganomics produced $200 billion deficits “as far as the eye can see,” the saying went. Actually, those deficits continued until the country elected Republican Congressional majorities in 1994. Within a few years, the continued $200 billion deficits under Clinton were turned around by Gingrich and those majorities into $200 billion surpluses, using sharp spending restraint and pro-growth tax cuts.
But the Left, as represented by the so-called Mainstream Media (what now should be called the party-controlled press), pounded away day after day for years about the supposed horrors of those Reagan deficits and the certain calamities they would produce. As a result, the party-controlled press missed entirely the economics story of the century, the world-changing Reagan boom, resulting from the most successful economics experiment in history.
Roaring inflation that increased prices by 25% during 1979 and 1980 was reduced by Reaganomics to 6.2% by 1982 and to 3.2% by 1983. The rise in unemployment starting in the 1970s peaked at over 10% in 1982, before Reaganomics reduced it to 5.3% by 1989. The Reagan defense buildup, which contributed to the deficits, led to the collapse of the Soviet Union, with Margaret Thatcher so rightly commenting, “Reagan won the Cold War without firing a shot.”
But none of this seemed to matter to the party-controlled press. All that mattered to it were the $200 billion deficits.
Now President-elect Barack Obama is reportedly preparing a budget with a deficit of $1 trillion. While the weak economy is reducing federal revenues, the enormous, unprecedented size of that deficit is primarily due to the Obama/Democrat stimulus package of $500 billion or even $800 billion, according to some reports. Expect to hear from the party-controlled press how that trillion dollar deficit is now all good and wonderful.
The Emperor Has No Clothes
The stimulus package is based on wave after wave of increased government spending for bailouts, infrastructure, and all sorts of government aid. Even the tax cuts that may be included are tax credits, which are effectively the same as government grants as far as the economic incentives produced, particularly when most of the credits would go to people who pay little or nothing in federal income taxes.
This “stimulus” package is not going to produce economic recovery. Economic prosperity is not based on government spending. It is produced by incentives for economically productive activity, such as saving, investment, entrepreneurship, starting or expanding businesses, job creation, and work, along with other pro-growth policies (the rule of law, property rights, freedom of contract, sound money, free trade). Those incentives are strengthened by tax rate cuts, reduced regulatory costs, and other measures that increase the reward, and hence the incentive, for productive activity.
Taking hundreds of billions out of the economy through government borrowing and then spending it does nothing to improve the economy on net. It does nothing to improve incentives for economically productive activity. That is why Obama’s trillion dollar deficit is not going to get America booming again. If the government spending is financed by taxes rather than borrowing, the effect is worse, because the taxes worsen incentives.
Obama’s massive government spending stimulus strategy takes us backward all the way to the 1930s, when President Roosevelt tried it. It failed, as shown by Amity Shlaes in her brilliant recent book about the history of the Great Depression, The Forgotten Man. As Shlaes wrote in the Wall Street Journal just last week, by 1938, six years into the New Deal, unemployment was still 20%. She adds, “Even late in 1939, total hours worked by the adult population was down by a fifth from the 1929 level.”
The new rage today is government spending to hire workers to build and restore infrastructure, such as roads, bridges, highways, airports. As if workers just wouldn’t be able to find a job anywhere unless the government hired them to build something. When Roosevelt tried that in the 1930s, unemployment was over 14% for 10 years, and had reached 25% or more. Millions of workers really couldn’t find a job anywhere else. Unemployment today is 6.5%, and it has been over 6% for all of three months.
More recently, Japan adopted an aggressive infrastructure building program to counter its deep economic slump in the 1990s. It had the same experience as America under Roosevelt in the 1930s, the sad economy continued for more than 10 years.
Government spending for infrastructure can do some good on net. Improved transportation networks can add to economic growth, for example. But borrowing hundreds of billions out of the private sector to finance runaway infrastructure spending is not a viable strategy for promoting robust general economic growth. Some new jobs might be created, but at the expense of other jobs that would have been created elsewhere if the capital had been left in the private sector.
Worst Treasury Secretary in
America had its own recent experience with a government spending stimulus package, apparently now all but forgotten. Roughly a year ago, the Bush Administration cut a deal with Congressional Democrats for a supposed stimulus package of over $100 billion primarily based on cash grants for all taxpayers. These cash grants involved no reductions in tax rates, and no improved incentives. I wrote at the time that this was an abrupt departure from supply-side economics, and was not going to work. On one of those White House cheerleading conference calls held regularly to promote the Bush agenda among conservative activists, I asked some brain dead senior White House economist what they were going to do after this failed. He said, “The economists I respect don’t think this will fail.”
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
The debacle of this president’s administration is both a cause and a symptom of the decline of American values. Unless Congress impeaches him, that decline will go on unchecked. An eminent jurist surveys the damage and assesses the chances for the recovery of our culture.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
The American Christmas, like the songs that celebrate it, makes room for everybody under the rainbow. Is that why so many people seem to be hostile to it?
Was the President done in by the economy, or by the politics of the economy?