Mulvaney said wider
deficits are an attempt to ramp up the economy. That's just what
Obama's aim was with his $787 billion stimulus program and other
spending. The Fed more than quintupled it balance sheet from less
than $900 billion in 2008, when Obama took office, to $4.4 trillion
now. The results were pathetic. Now Trump, who campaigned on reducing
federal spending is embracing it, calling for massive infrastructure
programs for highways, bridges, airports—just the kind of spending
Hillary Clinton promised to do—which Trump criticized during the
presidential campaign.
Obama favored the spending
policies of John Maynard Keynes that Franklin Roosevelt used to try
to pull the nation out of the Great Depression. It didn't work for
either Roosevelt or Obama. On
May 9, 1939, FDR's treasury secretary and good friend testified
before the House Ways and Means Committee : “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 enormous debt
to boot.”
The chart below
shows that Obama's massive spending to create jobs and improve the
economy was worse than doing nothing.
With/without Obama's Stimulus Program
The
chart shows (red line) the Obama administration's projection that the
stimulus program would hold unemployment under 8 percent. Instead,
unemployment actually rose higher than it would have been without the
stimulus, and it remained above 8 percent for more than three years.
Keynes
claimed spending—for anything—was the driver of the economy and
that government spending produced a “multiplier” effect as the
dollars were, in turn, spent again and again throughout the economy.
He had no evidence to support this. Keynes' biographer Hunter Lewis
says
“There's just no evidence" that spending ever cured a
recession, and Keynes "wasn't particularly interested in
evidence." Similarly, Harvard professor Robert Barro has
written:
“What few know is that there is no meaningful theoretical or
empirical support for the Keynesian position.” But the idea
sounded superficially plausible enough to provide intellectual cover
for what Franklin Roosevelt—and many politicians since—wanted to
do anyway: massive spending for political and ideological purposes.
The Obama
stimulus bill was based on a Keynesian multiplier of 1.5, meaning the
gross domestic product (GDP) will increase by $1.50 for every
additional dollar of government spending. This was voiced repeatedly
by the Obama administration, but there is no evidence that multiplier
is valid. If the multiplier really were
larger than 1.0, the GDP would rise even more than the rise in
government spending! The
U.S., Greece and other spendthrift countries wouldn't be going
broke—they'd be getting richer the more they spent! The reality is
that the multiplier is always less than 1.0. The benefits of the
money that is spent over and over in the private sector from the
government programs are always less than the cost of the programs.
Some businesses or sectors of the economy may benefit from government
economic policies, but those benefits are always outweighed by larger
losses elsewhere. Those losses are seldom figured in the
calculations—or publicity—for the benefits but always make the
overall multiplier less than 1.0.
Professor Robert J. Barro has done extensive research on Keynesian
multipliers. A recent study by Barro and Charles J. Redlick found a
multiplier effect of 0.4 to 0.7. The late Gerald W. Scully, a
professor of economics at the University of Texas at Dallas, analyzed
60 years of federal outlays and GPD, 1947-2007, and found a
multiplier of only 0.46.
The Keynesians implicitly assume that government can allocate
resources more effectively and efficiently than the private sector.
This is laughable. They argue that the multiplier effect allows
money to recirculate through the economy multiple times. But if the
same money were not preempted by government stimulus spending, it
would be spent multiple times by the private sector, too—and more
effectively. What makes the economy grow is not transferring more
money to the government to spend but leaving it in private hands,
where savings and investments are used to make workers more
productive. The research by Barro and Redlick found that if
government spending is funded by taxes, the multiplier is minus
1.1. In other words, if government raises taxes by $100, the economy
will shrink by $110. Government doesn't create wealth; it
consumes it.
The disparity of income between the rich and the poor often leads to
the erroneous belief that the poor are poor because the rich
are rich and therefore should be taxed more to redress the injustice.
And even though they did not cause the plight of the poor, it is
noble and righteous to redistribute some of their wealth because
equality is a supreme virtue. It is an ideal that is superior to
man's natural rights and the Constitution, which must be
“reinterpreted” to include them, making them more relevant for
today. (There is nothing in the Constitution that grants the
government the power to dispense charity, redistribute wealth, or
exercise any economic power at all.)
Public opinion polls show the populace wants government to do more,
no consideration given as to whether it is constitutional. A January
NBC/Wall Street Journal poll showed 58%--the highest share ever
recorded—agreed “government should do more to solve problems and
help meet the needs of people.” A Pew Research poll in January
found majorities believe the government does too little to help young
people, the elderly, the middle class and the poor and that
government does too much to help the wealthy.
The wealthy, of course, become the prime target for high taxes
because, as notorious bank robber Willie Sutton said, when asked why
he robbed banks, “Because that's where the money is.” The top
1 percent of taxpayers pay more federal income tax than the bottom 90
percent combined. The top 10% pay 71% of all federal taxes. And 45%
of Americans pay no federal income tax at all.
If there were no income disparity, and if there were perfect equality
for everyone regarding all material values, there would be no reason
for anyone to trade with anyone else. When two people agree to a
trade, it is because they have disparity in the values to be traded;
both place a higher value on what they receive than what they are
giving up in return. The trade is a win-win situation for both. In a
free market, all trades satisfy the participants' decisions that they
are benefiting by an exchange or it wouldn't occur. When government
intervenes with price fixing, subsidies, quotas, tax credits,
regulations that benefit one side or the other, or requires purchase
of something one doesn't want (e.g., Obamacare requiring everyone buy
health insurance), some people benefit while others lose, because
they wouldn't make the trade if not forced by the government. The
more controls or costs the government imposes on commerce—including
higher taxes—the more win-lose trades replace the win-win trades of
a free market, and the more inefficient the whole economy becomes.
This is why tax cuts by presidents Ronald Reagan and John Kennedy
resulted in increased tax revenue for the government. When Reagan
became president, he reduced the top
marginal income tax rate to 28%, from 70%, but when he left office,
tax revenues had almost doubled. When Reagan took office in 1981, the
top one percent of income earners paid 17.58% of all federal income
taxes. Twenty-five years later, in 2005, that one percent paid
39.38% of all income taxes despite being taxed at a lower rate.
In the 1960s President Kennedy cut
the highest income tax rate to 70% from 91% with a similar result.
Presidents Harding and Coolidge cut federal income taxes several
times throughout the 1920s, sharply lowering the top rate in steps to
25% from 73%. As the top tax rates were cut, tax revenues soared, as
did the share paid by the rich. Those earning over $100,000 paid
29.9% of the total in 1920, 48.8% in 1925, and 62.2% in 1929.
Between 1921 and 1928 the share of overall taxes paid by this group
rose from about one-third in the early 1920s to two-thirds in 1928.
The
larger tax revenues government receives from cutting tax rates are
reversed when taxes are increased. Between 1968 and 1981, under the
bipartisan tax increases of Presidents Johnson, Nixon, Ford and
Carter, the income tax payments from the top one percent of earners
shrank to 1.5% of GDP from 1.9%. And the average annual return from
the stock market from the post-Kennedy peak in early early 1966 to
the low August of 1982, before the Reagan surge took effect, was
minus
6 percent per year for 16 years.
Much of the above is from my
book The Impending Monetary Revolution, the Dollar and Gold,
Second Edition, which contains additional information on the
issues in this blog posting.
