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Spending is No Stimulus

December 2, 2010

Cause & Effect… Tax & Spending

We are at a fork in the road, our government has us on a path that’s unsustainable. The federal budget needs to be gutted like a fish. And the guts used to fertilize capitalism. Soaring spending — not low taxes — is driving the budget deficit. Those who blame the past decade’s deficits on $1.7 trillion in tax cuts have been oddly silent about the $5 trillion in new spending over that same period.

And get this: Virtually all the tax increases proposed or enacted over the past two years — the ObamaCare taxes, tobacco taxes, cap-and-trade taxes — have already been earmarked for new spending. And with the government set to spend an unfathomable $46 trillion over the next decade, blaming future budget deficits on extending $0.7 trillion worth of “tax cuts for the rich” is quite selective, if not disingenuous.

All government stimulus spending requires first borrowing dollars that would have otherwise been applied elsewhere in the economy. The only exception is money borrowed from “idle savings.” Once it becomes clear that government spending only redistributes existing demand, the case for “stimulus” spending collapses.

Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another. It is intuitive that government spending financed by taxes merely redistributes existing dollars. Yet spending financed by borrowing also redistributes existing dollars today. The fact that borrowed dollars (unlike taxes) will be repaid some years later does not change that.

Government spending has an abysmal track record of stimulating the economy. Yet, these repeated failures have not stopped lawmakers from proposing and enacting a seemingly endless string of “stimulus” bills. Some government stimulus dollars are even being spent on mascot costumes, electric golf carts, and a university study examining how much alcohol college freshmen women require before agreeing to casual sex. Feds also spent $2.6 million training Chinese prostitutes to drink more responsibly on the job and $800,000 of economic stimulus on an African genital-washing program.

The U.S. economy has soared highest when the federal government was shrinking, and it has stagnated at times of government expansion. You can’t borrow your way out of recession & you can’t spend your way out of debt. In fact, it is a mathematical impossibility to get out of a credit recession with more debt.

Yes, government spending can recirculate through the economy via the multiplier effect. But the same dollars would have recirculated through the private economy had they not been lent to Washington to start with. What’s a multiplier? It is the amount of new economic activity generated by $1 of stimulus determined by either tax cuts or spending increases.

A lower multiplier is bad. A higher multiplier is good. Spending impacts (bad) die faster than tax cuts (good). Tax cuts impact growth and sustain themselves greater over a period of time. Because the stimulus package focused on spending and not tax relief the long-term stimulus multiplier is much lower; resulting in a limited long-term impact on the economy.

Yes, in a recession, Washington can spend $814 billion putting idle factories and people to work. But that requires first borrowing $814 billion of spending power out of the private sector, which — by the same logic — will result in idle factories and workers in the locations that financed the stimulus.

In that sense, government spending is the equivalent of removing water from one end of a swimming pool, dumping it in the other end, and then claiming to have raised the water level. As Heritage points out, government stimulus spending represents a naive “magic wand” attempt to create purchasing power and wealth out of thin air.

It’s worth noting that in 1801, when Thomas Jefferson became president, the US national debt was around $100 million, about 10 times annual federal revenues. This was literally “the cost of freedom,” and would correspond today to a national debt around $30 trillion. Since our actual national debt is $13+ trillion, the government is in better financial shape today than it was in Jefferson’s time.

And at the time, Jefferson’s number one priority was paying down the national debt. So, how did he do it? How does ANY wise government ever increase its revenues? Yes, that’s right! Jefferson reduced government spending and cut taxes.

Soon the national coffers were overflowing with revenues, paying down the debt, and the economy was booming. And what was Jefferson’s number two priority? Well, there was a small matter of pirates and piracy (Islamic terrorists) in North Africa. Jefferson started a “war of choice” against them, to eliminate the annual tributes America was paying — the First Barbary war.

But even with paying for the war, the US economy & federal revenues grew so fast, Jefferson had no problem coming up with (the unconstitutional) $15 million needed for the Louisiana purchase, and still paid down 30% of the national debt by the time he left office in 1809.

Do you suppose there’s a lesson to be learned here?

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