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A Further Perspective
It’s About Reality, Not Austerity
A state cannot run an economy and a state-run economy cannot sustain its state.
Today’s European debate isn’t about governmental austerity, it’s about governmental reality. Ultimately, the argument is not whether governments can keep trying to stimulate their economies, but when their creditors will quit financing it. Somehow, Europe’s governments, teetering on tilting economies, have missed this point; we can only hope that Washington hasn’t.
We are witnessing a prolonged domino-effect among the world’s economically intrusive states. It began over two decades ago with the fall of the USSR and communism across Eastern Europe. Now the dominoes are falling into Western Europe — Greece, Portugal, Spain, and Italy, all are threatened with economic collapse.
By now, the obvious should be axiom: A state cannot run an economy and a state-run economy cannot sustain its state. The more of its economy a government consumes, the less productive its economy becomes. And the more dependent its subpar economy then becomes on its government.
This vicious cycle creates a widening gap between what the government promises and what its economy can deliver. The government resorts to spending more, while its economy responds by producing increasingly less of the revenue needed to finance the government’s increasing spending.
The only reconciliation possible between the over-demanding government and its under-producing economy is borrowing. Once this pattern becomes firmly and deeply established, the conclusion becomes inevitable. Political oppression — as in both former and current communist countries — can temporarily extend the contradiction, but it cannot extinguish it.
Of course, there are liberals who dispute this scenario — just as they dispute anything that questions the state’s efficacy. They claim that governments can and should do more — that government spending actually stimulates the economy.
There is no more than a limited truth to this: Simply because of the way that GDP is calculated, government spending can make the official numbers look better… temporarily.
However, over a sustained period, this amounts to merely cooking the books. The problem remains that nagging gap between governmental demand and economic production: someone has to finance what the economy cannot.
Nor are the government’s demands static either. Once political promises of increased economic benefits are made, voters demand that they not only be met, but expanded.
Equally important, as crisis looms, the economically interventionist government finds itself less able to address it — precisely because of its now routine expanded intervention.
In 1930, the year after the Great Depression began, federal spending was 3.4 percent of GDP. By 1936, as FDR and the New Deal faced reelection, federal spending was 10.5 percent — a threefold increase — insufficient to end the Depression but still a sizable proportional increase. According to the Congressional Budget Office, over the last 40 years, federal spending has averaged 21 percent of GDP. To proportionally match the New Deal boost, federal spending would need to be over 63 percent of GDP — a politically and economically impossible figure.
We therefore find ourselves dealing with quantitative, not qualitative differences when it comes to economically intrusive governments. All else being equal, the more intrusive will fall first, yet even in the case of the less intrusive, it is not a question of “if,” but “when.”
The gap is remorseless and must be financed. Capital is mobile, while the government’s clientele is stationary — if not expanding. The “demand” stays and increases, while the “means” flees to where it is most rewarded and it takes ever increasing borrowing costs to bribe it back.
Over the last four decades, the federal government has averaged spending roughly one-fifth of everything America produces. Over the last three years, it has averaged almost one-quarter — spending an equivalent of 24.5 percent of America’s GDP.
America is approaching a point where it must ask what road it wants to follow.
One is the politically easy, but economically impossible, route of attempted government-induced prosperity. If this is the one chosen, then Washington needs to start arranging its lines of credit quickly. Which should be relatively simple at the moment, since so many lenders now are fleeing Europe’s collapsing economies.
About the Author
J.T. Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a Congressional staff member from 1987 to 2000.
Letter to the Editor View all comments (42) | Leave a comment
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Bill Hussein O'Stalin| 6.14.12 @ 6:59AM
If the American public could be introduced to any article in any publican in America today this would be it.
Such words of facts though, often are not seen by many or are ignored since the article contains long words and economic concepts most Americans would not understand.
If you any article today, read this. Beautifully done!
JD| 6.14.12 @ 11:45AM
Since 2001, federal revenue is up 40%, and federal spending has doubled.
Pecos Pete| 6.14.12 @ 7:06AM
Forward to California!
UpChuck.Liberals| 6.17.12 @ 4:38PM
Heh, I believe you mean to imply 'Forward to Kalifornia & Failure'. With the PDSRK, Peoples Demokratic Socialist Republik of Kalifornia, circling the drain it may take two flushes to get it all the way down. Can someone loan us the water, please.
Appleby| 6.14.12 @ 7:10AM
Canada, which is currently helmed by what passes for a Conservative in Kanukistanian socialism (he's a moderate Democrat in American terms) has refused categorically to contribute to the IMF to bail out her socialist sisters-in-arms, causing the Socialists (NDP) and the remnant of the Liberals (other socialists) to scream and everyone else to breathe a sigh of relief. Meanwhile in Montreal, the "students" continue to scream and kick and flail their arms -- having tried banging pots and pans, stripping nekkid and running down St. Catharines Street yelling "Poo Poo Head!" and disrupting the Formula One race, they are now GOOSE-STEPPING AND DISPLAYING THE NAZI SALUTE. In this way they expect to bully the government into giving them "free" tuition for as much University as they choose to consume. A little taste of Greece right in our back yard.
C'mon Man!| 6.14.12 @ 1:13PM
I wish the US would stop throwing money at the IMF and the UN. Total waste of money, for morons to try and tell us what to do, yet they can't even run their own countries, unless you count running them into the ground.
TLP| 6.14.12 @ 7:16AM
"Federal Spending on Jobs doesn't work. It's never worked" - borrowing a Famous Quote from President Kardashian. (Thank You - Rush)
He, of course, said that "CAPITALISM, in America, doesn't work. It's NEVER worked". (Coming from a guy who doesn't work, and has NEVER worked.) If he had said what I put up there, he would have been telling the truth. Federal Spending, Socialism, and John Maynard Keynes, doesn't work. It's never worked. And, I'll tell ya why. Because Power Corrupts, and Absolute Power Corrupts Absolutely.
When Banks loan money, all they want is to be Paid Back, on time, with interest. When the Feds loan money, whoever takes it is subject to a never ending Labyrinth of Hoops, and Hurdles, and all kinds of MANDATED SH*T in the fine print, that they must comply with, by Force of Law. (If you're White.)
Look see why the Depression lasted so long. Then compare that, with today. (Nice work, if you can get it)
Now, add on a Regime in Washington, that is Openly Hostile to a Market System, and is more than willing to use its Depts of Energy, Interior and Justice, its EPA, its NLRB, and its Street Gang Occupiers to make life as hard as they can for Business, PLUS a Gangland President who's running a Money Laundering Scam and a Shakedown Operation, at the same time, and you've got "Doesn't work. Has Never worked".
Just like Him.
DRed| 6.14.12 @ 11:10AM
Obama never said that capitalism in america doesn't work. Rush Limbaugh said that's what Obama said. Remember, Rush is first and foremost an entertainer. Something of a jokester. You shouldn't take everything he says so seriously.
aware| 6.14.12 @ 2:15PM
Dittos.
Truth to Power| 6.14.12 @ 3:37PM
Of course. Leftists have abandoned state owned socialism and are all in on fascism. They are shakedown artists and use the money to pay off money bundlers and such. All the whining that lefties do is directed at increasing their take. We get you DRed. You are corrupt slime bag.
TLP| 6.14.12 @ 3:53PM
That's EXACTLY what he said.
What's wrong with you?
The Bruce| 6.14.12 @ 4:20PM
Really, DRed?
http://www.youtube.com/watch?v=xBrm_bjrQQ8
DRed| 6.14.12 @ 4:30PM
Yeah. Really. Saying unregulated capitalism doesn't work doesn't mean you think capitalism doesn't work. Can you not understand the difference?
And Timmy, if you can find me a quote of Obama saying "CAPITALISM, in America, doesn't work. It's NEVER worked" I will send you $300.
TLP| 6.14.12 @ 5:48PM
If I can show you?
You just said it, yourself.
Capitalism has been REGULATED, since Teddy Roosevelt.
The only Economic System that has NEVER WORKED, is the one your boy is trying to ram down our throats, now.
TOTALLY REGULATED SOCIALISM.
Take your Stupi Sh*t someplace else.
Quit being a Punk.
Truth to Power| 6.14.12 @ 5:59PM
regulated capitalism
In prog talk this means you have to pay the appropriate prog so he can pay some of his gay money bundlers. Corrupt government doesn't help anybody but the progs and their pals.
aware| 6.14.12 @ 6:53PM
If it is "regulated" is is not capitalism.
markenoff| 6.14.12 @ 8:40PM
True capitalism does not exist once government gets involved in any economic transaction. It is interesting, however, that leftists always want to compare theoretical, utopian socialism/communism with actually existing capitalism. They always argue that actually existing communism/socialism under Mao, Pol Pot, Stalin, Hitler, Mussolini and Castro is not "true socialism". If only Lenin had lived! Except it was Lenin that started the Gulag. To paraphrase, If men were angels socialism would have no appeal. Because they are not angels socialism should be avoided.
jaytrain| 6.14.12 @ 8:23AM
And Romney should add to his platform a commitment that Caly and Ill . are on their own , that they have made their mess and they own it . It will add to his bona fides as a true' conservative' and awaken the nation to how grave the debt /spending crisis is . To wit , anytime Obama even vaguely refernces Europe as an excuse , run it right down his throat that these United of States is going the same way too .
Von Mises Jr| 6.14.12 @ 9:04AM
Our problem is much more dramatic than federal spending going from 18-20% to 25% in the last decade. Markets are forward looking. And they are dynamic in their approach.
Consider: our banking system now operates by borrowing at the Fed Window at .002 and buying T-Bills at 2-3% coupons (all you can eat). GM owes $30B of the $50B loan and got another $50B in tax breaks. We bailed out GM to the tune of $80B with little hope of even getting the $30B back. GE run by Crony Capitalist Immelt paid zero federal taxes last year on $14.2B with $5B earned in the U.S. Our health care system has been nationalized. Student loans are nationalized. Fannie and Freddie continue to corrupt the housing market and cost us tens of billions at a clip to keep them from imploding.
The problem is that the other 75% of the economy is being run in a centrally planned fascist model. There will be little innovation, capital formation or efficiency coming from a planned and bailed out Bush/Obama style regime.
JD| 6.14.12 @ 2:27PM
Don't use that "GE paid zero taxes" line without context. The vast majority of "paid zero taxes" stories come with carried losses. It would be criminally wrong to have a tax code that taxes a person who makes $40K/year every year far less than an entrepreneur making $100K one year and -$20K the next.
TLP| 6.14.12 @ 3:56PM
GE paid Zero taxes, on $5 Billion in profits.
GM paid Zero Taxes.
Chrysler paid Zero Taxes.
His Union Thugs paid Zero Taxes.
Are you really this Stupid? Or, are you just a LIAR, like every other Liberal POS?
JD| 6.14.12 @ 4:15PM
I am not a leftist. Not even close. And it is leftists, primarily, who condemn the fact that GE paid no taxes IN ONE CALENDAR YEAR.
To avoid dishonesties like theirs, it would be better to, when considering a single entity, take their taxes over 10 years. Otherwise small sample size distorts too much. One-year tax analyses should only be performed on larger swaths of the population.
DRed| 6.14.12 @ 4:39PM
You don't get sweet tax breaks as a corporation by contributing to one party or one politician. You just give lots of money to Congress. Look at GE's political donations (since that's been brought up).
http://www.opensecrets.org/org.....D000000125
Notice what they do? They give money to everyone, but especially to whomever is power. GE (broadly speaking) doesn't give a damn who is in Congress as long as the people in Congress are willing to do things for GE.
TLP| 6.14.12 @ 5:54PM
Excuse me. Jeffery Immelt is an Obama Butt Boy, hence- NO TAXES. GM is OWNED by Obama's Butt Boy Unions, Ditto - Chrysler - and they pay NO TAXES. His Butt Boy Unions pay NO TAXES.
What am I saying, that you can't seem to get through your thick Skull?
Solyndra?
STFU, and be a man.
You sound like a Punk.
DRed| 6.14.12 @ 6:16PM
No, Timmy, I don't know what you're saying, because you are over excited and rambling again. Do you think that before Obama became president GE had no preferential treatment from the government? If Mittens takes office do you think that GE will suddenly start paying a lot of money in taxes?
Here, take a look at Jeff Immeldt's political donations-tell me, based on this list, which political party he favors:
http://www.newsmeat.com/ceo_po.....Immelt.php
aware| 6.14.12 @ 7:00PM
He favors the only "party" there is, the Uniparty. And he covers both wings.
Truth to Power| 6.14.12 @ 7:56PM
When you pay to the big O's administration, he doesn't give you back some of your money you gave him, he gives you the money directly from some other taxpayer. No more money to his gay money bundlers. Patron politics is for Mexico and Detroit.
ata777| 6.14.12 @ 9:22AM
the central problem here is emotional, not economic. in plain talk, progressives are incapable of admitting when their policies have failed. thus they will continue promoting stimulus of one kind of another until it all collapses--at which point they will absolve themselves as they always do: we only meant to help.
Mike G| 6.14.12 @ 9:31AM
"Somehow, Europe's governments, teetering on tilting economies, have missed this point; we can only hope that Washington hasn't."
Obviously the pols haven't gotten the point. If they had, they would be cutting actual spending instead of proposing cuts in future spending.
KenFord| 6.14.12 @ 9:36AM
Dear Sir:
The figures that everyone in public life talks about as Gov't spending percentage of GDP are wildly inflated. The entire cost of entitlements is included, but only the administrative cost is part of the productive economy. The rest is simply transfer payments from one bunch of taxpayers to another.
KenFord
JD| 6.14.12 @ 2:31PM
Which figures are you talking about? The GDP figure, or the government spending figure?
The government spending figure is wildly under-reported due to spending through the tax code, which now exceeds $1 trillion annually.
The GDP figure is probably over-reported due to government transfers being treated as productivity.
All told, that means the ratio is way too low.
Who Knows?| 6.14.12 @ 1:03PM
The word is---SUPPLY.
Like a two-year-old, anyone, or a group of people like a government, can DEMAND away. They can even demand what doesn’t exist.
Indeed, you could say that is what’s going on, with blazing fury, these end-of-days.
So many economic ignoramuses!
Besides reading, writing and arithmetic, humans should be taught at the earliest age the one true law—
SUPPLY and DEMAND.
As soon as possible, they should be required to study the supply-demand curves, for as long as it takes, in baby steps, if necessary.
Newbies badger parents about where they came from.
Well, society should force future members of itself to learn where THINGS come from!
And, in tandem, wherefrom PRICES arise, and how and why they fluctuate.
Essentially, then, given the rotten state of ALL governments, even those chosen by “free” peoples, we have to acknowledge a most inconvenient truth—
Most people are deluded, living in a fantasyland of beliefs that don’t comport with real REALITY.
Things are MADE by SOMEONE!
Supply comes first!
JD| 6.14.12 @ 2:40PM
The Left insists that lack of demand is our problem. This is absurd.
The only way there's lack of demand is if everyone has everything he wants. That's certainly not true in this economy. The problem here is that those who want things have nothing to trade in exchange for what they want. That is a SUPPLY problem.
Consider a society where everyone is poor and no goods or services exist. This society certainly lacks supply. According to the definition of the Left, it also lacks demand, since no one can afford to buy anything. How will we fix this society? By solving the demand problem, or solving the supply problem?
Let's try supply:
A member of this society starts making a product. Now he has that product for himself, but he can't buy any other products because no one is making them, and he can't sell his product because no one can buy it. But then a second person makes a second product. In addition to having that product for himself, he can trade with the first person. Now each of them have two products, plus excess supply of what they make. Enter a third person and a third product. And so on. By producing, these people created not only the missing supply, but also the missing demand. They, the producers, had additional need, and their production was currency they could use to buy what they needed. Thus did increasing supply also solve the "demand" problem.
JD| 6.14.12 @ 2:41PM
Now, let's try fixing our poor society by increasing demand:
How? Good question. I suppose some rich foreigners could show up wanting to buy stuff, but where do they come from? Ours is a global economy already, so are we waiting for aliens? And if they came to buy, we would still have to make supply to sell to them. And what makes us think they would buy from us, when clearly their economy is already prosperous (since they have money to burn). Why don't they buy more from themselves?
No, they'd buy from us all right, but it'd be in the same way that we have bought from China and India - using cheap, desperate people as labor. Is that what the Left wants us to become as they save us by increasing demand?
TLP| 6.14.12 @ 4:00PM
And, of course, the Optimum Words, in all of this is TWO YEAR OLDS.
dickdata| 6.14.12 @ 1:52PM
Spain wasn't running deficits prior to the financial collapse - they suffered from a real estate bubble from money flowing into the country. When that bubble collapsed in the financial collapse, the Spanish real estate became relatively worthless, people could not afford their homes and lost them, and the economy collapsed. None of this was under the control of the Spanish government.
JD| 6.14.12 @ 2:32PM
So you're saying that if not for the bubble, they would have been running deficits all along?
Truth to Power| 6.14.12 @ 6:04PM
What a bunch of nonsense. Spain went left and became the typical leftist spendthrift government. Now it is time to shut down their ridiculous green energy programs and become a sensible government again. Leftist are the one who are worthless and unsustainable.
Kwan| 6.14.12 @ 2:52PM
Ultimately, the argument is not whether governments can keep trying to stimulate their economies, but when their creditors will quit financing it....Like a Bernie Madov Ponzi scheme the suckers wake up when the interest payments stop being made and when they call-up to find out what happened the phone has been disconnected. Obama's economic policies can best be categorized as dumb, dumber, more dumber, and much more dumber. As Obama grows and grows the government the private sector whose taxes must pay for thus out-of-control growth is shrunk due to over-regulation and taxation. This can best be compared to Mao's Great Leap Forward which resulted in one-step forward and ten-steps backward for China.
Marie| 6.14.12 @ 3:48PM
All I can say is hopefully the German people DO get fed up with the socialist "gimme" states and stops bailing them out.
ONTIME| 6.14.12 @ 10:00PM
As long as we keep feeding the PIIGS, they will keep coming back to the trough......quit the enablement.
jdmeth| 6.15.12 @ 2:51PM
Remember, the people borrowing the money and the people benefiting from the spending are not the ones who will have to pay it back. The borrowing and spending will not stop until the lenders quit lending. Congress can then print money and spend it until the economy completely collapses. The rich and powerful will have already made arrangement for safe refuge in some more stable country but the rest of us are going to experience a real life Apocalypse.