Tax Plan, Schmax Plan: It’s The Spending, Stupid

Why can’t we just stretch the federal budget a bit…bigger?

The GOP has recently been working on tax reform, and both the House and Senate have versions of tax reform that are currently being hashed out in conference between the two houses.  Aside from the caterwauling on the left side of the house, predictions of our moon exploding and destroying all life on the planet because taxes might be cut, reform of one kind or another is inevitable.  Why?

Because it’s not really the revenue side of the equation that’s the bulk of the problem.  It’s the spending.

Why does spending go through the roof, annually?  Because the government can.  Because politicians are rarely penalized for spending money.   They’re typically rewarded for it, by being re-elected.  They’re rewarded because they brought some of that federal pork back to their home states, and not coincidentally, their names are often found on the outsides of buildings that other people paid for.  Some states are even proud of their Congressional representatives “bringing home the bacon” for them, as if there’s just a pile of magical money in DC and the job of Senators and Representatives is to back U-Hauls up to the pile and shovel as much in as they can (or pay their staffs to shovel), then call it a day.

The result of all this shoveling is $20 trillion in debt.  That’s a $170,000 debt burden for every taxpayer – not every American, mind you, but just those who actually pay net income taxes.  As the debt has doubled in the last 8 years, and the annual federal government’s spending has followed that same doubling, what’s happened to economic activity?  Based on the hysteria of the left over tax reform, our very lives depend on government spending, because apparently all economic activity will come to a halt if we spend one less dollar next year.

But the reality of the economy is much different from those idiotic rants.  In fact, if you take a look at the data, the opposite is true.  As federal spending goes up, the M2 velocity of money goes down.

What’s the velocity of money?  Let’s let Fred tell you.  He’s got all the answers here:

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.

 

If you take a look at federal debt alongside the same M2 indicator, the idea that federal spending is what keeps the economy going (according to permanently-ensconced chowderheads like Nancy Pelosi), goes “poof”.  It’s an idiotic assumption, that all federal spending is a net positive, and to even challenge that piece of it is something that’s off the Left’s table.

So as spending and debt go up, economic activity goes down.  This is apparently news to Democrats in Congress.

But that’s the crux of the argument.  You can’t have tax cuts, because we’ll be able to spend less, even though spending goes up, annually, regardless of tax revenues.  The gap between spending and tax revenues is a permanent one, and any change to the status quo is Armageddon.

As the tax bill currently stands, the corporate tax rate reduction to 20% would put the United States on a much more level playing field with other countries, even if the effective rate is always lower than the official rate (which is another argument to strip down the tax code and carve-outs, but that’s a longer conversation).  If you’re looking to free up capital that companies would use to expand and invest, that’s a very quick way to do it.  At the very least, it would bring our rate nearer to the average of the G20 countries, which improves the ability to compete:

 

While the tax reform bills are a small step forward, the really tough work is on the other side of the table, and not the ideological one.  The toughest challenge will be spending, and reducing it, so the debt above doesn’t crowd out all other economic activity, and dampen growth.  Since debt is now over 100% of GDP (below), and the economy, while growing, is growing at historically low levels, especially coming out of recession, one is left wondering if Congress has the ability to stop this descent into madness.  They don’t seem to be willing to even slow it down.

It’s an abdication of responsibility.  Considering the incumbency rate, we are going to continue to let them fail, and not hold them accountable.  Then it becomes our fault, not theirs.

 

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Tax Cuts: Worse Than Hitler!

Tax cuts, often championed by Democrats (when they want to take credit for economic growth), are Bad, Horrible, Awful Things again, because, well, Trump and Congress

Take *that*, tax cuts! Er, Hitler!

are working on them.

As a fine example of a histrionic and economically illiterate analysis of the recently-proposed tax cuts, I give you the The Washington Post, that long-standing bastion of Austrian economic theory.  How will the Post provide its readers with details around a policy that will impact the half of the country that actually pays taxes?  Standing in as the sharp end of the Post’s analytic spear, the Post offers up Ruth Marcus, for the delightfully (and, one might guess, purposefully) limited take on the impacts of tax cuts and tax increases:

Yes, the economy grew robustly after John F. Kennedy proposed and Lyndon B. Johnson signed a tax cut in 1964 (the top rate went from 91 percent to 70 percent) and after Reagan cut taxes in 1981 (he later raised them, because of fears of the ballooning deficit). But the economy also grew robustly after Bill Clinton raised taxes in 1993 and anemically after George W. Bush cut taxes in 2001 and 2003.

What’s missing in Ruth’s cursory review of the economy, after tax cuts and tax increases, is telling.  Clinton, for example, after raising taxes in 1993 (which included an increase in the taxable portion of Social Security benefits, because, y’know, he’s a dude of the people), signed an enormous tax cut in 1997, which spurred even larger and more consistent growth.  These tax cuts are consistently attributed with spurring the growth in the 1990s – not the primary driver, but certainly a major contributor.  From the study:

From 1993 until 1997, the economy grew at 3.3 percent per year.4 While solid, this growth was certainly not exceptional. During that same time, real wages declined, despite the perception that the 1990s were an era of unmitigated abundance.

It was not until after a 1997 tax cut, passed by Congress—a tax cut President Clinton resisted but ultimately signed—that the spectacular growth kicked in. While small in static revenue impact, the 1997 cuts included a reduction of the capital gains rate from 28 percent to 20 percent. This opened the capital floodgates necessary for entrepreneurs to develop, harness, and bring to market the wonders of the new information technologies. business investment skyrocketed after the tax cut,6 and the economy grew at an annualized rate of 4.4 percent—33 percent faster than after the Clinton tax hike—from 1997 through the end of the Clinton presidency. Real wages reversed their downward trend and grew 1.7 percent per year during the same time.

Oh, and as for George W. Bush’s tax cuts – I’d also like to add that something else happened in 2001 that dramatically affected the country, and the economy, but hey, tax cuts didn’t spur growth.  I get it.

But because we’re having trouble finding people who are for tax increases, here’s the former tax-increaser himself, Bill Clinton, calling for a corporate tax cut rate, in 2011.  Which runs kind of counter to Ruth’s argument above.  But let’s let the Hayek (not Salma) – loving President call it in his own words.

“When I was president, we raised the corporate income-tax rates on corporations that made over $10 million [a year],” the former president told the Aspen Ideas Festival on Saturday evening.

“It made sense when I did it. It doesn’t make sense anymore — we’ve got an uncompetitive rate. We tax at 35 percent of income, although we only take about 23 percent. So we should cut the rate to 25 percent, or whatever’s competitive, and eliminate a lot of the deductions so that we still get a fair amount, and there’s not so much variance in what the corporations pay.

Bill’s point isn’t a new one.  The US is at a competitive disadvantage with foreign corporations that pay a much lower rate

One of these things is not like the others.

than the current 40% we’re sporting here in the US.  In fact, if you stack us up with the EU, etc., the disparity becomes starkly clear:

Simply put, if you believe that the real engine for growth isn’t the government, but rather the people choosing what to do with their money, what to buy, invest in, or save, then you’re probably not a Democrat.

The sad fact is, though, that the other party, the Republicans, isn’t much better on this front, and have voted for massive spending increases, and have justified those increases in much the same way that Democrats do, which is that they try to pitch the spending to the groups that vote for them, to demonstrate the ways that spending benefits that specific group.  In other words, they’re buying votes, with tax dollars.

As Ruth Marcus continues, though, apparently now we’re supposed to care about debt, when Republicans offer a way to improve the economy.  I’m guessing Marcus’ track record as being a deficit or debt hawk was a weak one from 2008-2016:

Meanwhile, the national debt is 77 percent of the economy, the highest since the end of World War II. It is on track to exceed the entire gross domestic product by 2033. That is even without a $1.5 trillion tax cut, the amount envisioned in the just-passed budget resolutions.

The debt doubled in 8 years under Obama.  It took 240 years to get to $9 trillion in debt or so, and in 8 years, that debt doubled.  But even that misses the point – it’s not

So – we’re just going to spend, regardless of revenue.

the tax revenues we’re collecting that drives the debt, it’s the spending.  The enormous gap between revenues and spending is startling – not just the gap, but how much more money we’re both collecting and spending.

Not one peep from Marcus about spending.  Not one mention in her article about the enormous leap in federal spending.  If the tax cut decreases revenues, which it should, of course the gap will widen.  But is the problem revenues?

Or is it, eternally, the unshakeable belief that all spending is a net good, that people keeping more of the money they earn is bad, that rich people (who pay 97% of all income taxes collected) are bad, only those who would spend the money other people earn are inherently, and by default, good.

It’s this sort of acquiescence to a large, centralized, and politicized government that’s caused the deaths of tens of millions in the 20th century, and as the hoary governments of places like Venezuela demonstrate, the catastrophes will continue, no matter how many times the lesson is thrown in our faces.

That reality doesn’t change Marcus’ conclusion, though – that tax cuts are reckless.

Trump wants tax cuts — the biggest ever! — because he promised them. Republicans take tax cuts as a matter of faith; they are desperate for a legislative win, any win, to take to voters next year. So deficit-financed tax cuts may be a political imperative. As an economic matter, they are simply reckless.

No word yet on Marcus’ forthcoming article that might state why the spending is reckless, or the debt incurred under the last administration might also be reckless, and

It’s not just 80’s hairstyles that can be reckless.

how the biggest drivers of future economic disaster are Social Security, Medicare, and Medicaid, and their unfunded liabilities in the trillions.  Those are not even

mentioned, en passant, in her article.

Maybe that was just an oversight in her article.  Or maybe it was just reckless.

 

 

…And Medicare For All

Bernie Sanders, “independent” Senator who’s not from Vermont but owns two houses there, has recently found the time in

What a Senator looks like when you explain the phrase “unfunded liabilities” to him.

his busy schedule to suggest yet another unworkable, ill-conceived, and destructive way to increase federal power and reduce the choices people can make.  Whoops.  I meant “Give everyone something for free, again, without figuring out how in the hell to pay for it”.

Bernie even conveniently slaps a group of meaningless statements on the splash page of his shiny, new, taxpayer-funded website, where such complex ideas as payer mix and 4,000 pages of the tax code are easily, casually batted aside in favor of putting words up on the internet and hoping they mean something when he tries to run for President again in 2020.

Which really means he hopes they’ll buy him some votes.  But I repeat myself.

Bernie’s solution to a multi-trillion dollar health care problem is…more cowbell!  In the form of more (not less) Medicare!

But wait.  I thought Medicare had unfunded liabilities in the trillions of dollars ($28-35 trillion, but what’s ten or twenty trillion amongst friends?).  Why would a sitting (mostly sitting, but frequently kvetching) US Senator want to run up the credit card on US taxpayers, and worse, run it up on taxpayers who aren’t even born yet?

Let’s let some of Bernie’s ideas speak for themselves – these ideas should guide our thinking, and convince us that he’s got the best idea ever, right?  Here’s one:

You mean Obamacare didn’t do this already? Fail.

We must ensure all Americans can access the health care they need regardless of their income.

It’s great to have someone who can afford 3 houses keep the little people of America in mind while he’s posting insipid graphics on a taxpayer-funded website.  But, to address his statement:  Everyone already has access to health care.

I’ll repeat it:  Everyone already has access to health care.

What they don’t have is a government-issued insurance card, which does not guarantee access to health care, or hire or train one more doctor, nurse, or anesthesiologist.

So the issuance of a new “Medicare For Everyone!” insurance card won’t increase access for anyone.  Anywhere.  In fact, given the reality that many providers won’t take Medicare patients, because this version of single-payer does not reimburse providers at cost, it will likely mean even fewer people will have access to health care, which really means access to a provider.

By “our”, does Bernie mean he’s going to be treating patients? One assumes he won’t be checking party affiliations when choosing which patients to see.

We must get our runaway health care spending under control by eliminating waste and focusing on our patients.

Health care spending is “running away” for a host of reasons, very, very little of which has to do with waste.  The rate of private insurance price increases has everything to do with the cost-shift from Medicare (and Medicaid) to private insurers, which results in even less access to care.  From the link:

Once again, each round of Medicare cost shifting to non-Medicare patients routinely shows up in higher insurance premium costs for younger workers and their families, who are already paying the bulk of Medicare bills through their taxes. The level of Medicare cost shifting and the impact on private health insurance will vary from year to year, but these additional costs are in the tens of billions of dollars annually.

In sum, today Medicare imposes financial obligations on most taxpayers in three ways: (1) through their payroll taxes, (2) through their general revenue subsidies of Part B and Part D, and (3) through higher premium costs in their own private coverage to offset Medicare payment policies. For upper-income Americans, the new Medicare tax of 3.8 percent on their “unearned” income, such as stocks and bonds, is earmarked for funding the provisions of the PPACA, not Medicare.

Oh, and that Mayo Clinic picture, above, that Bernie uses on his website?  Here’s some revealing Medicare text directly from the Mayo Clinic:

Although Mayo Clinic doesn’t participate with Medicare Part B, Medicare will help pay for services provided by Mayo Clinic. Claims will be filed to Medicare Part B and supplemental or secondary insurance companies on your behalf. Medicare Part B and supplemental or secondary insurance payments may be sent directly to you. Patients will be responsible for reimbursing Mayo Clinic for any payments they receive and any balances not covered by their insurance.

In other words, Medicare doesn’t cover everything the patient is charged.  It’s not a free medical cost deflector shield.

But let’s have just one more bite at Bernie’s Medicare apple:

Do we need a system that covers people who only own 1 house?

We need a system that works not just for millionaires and billionaires, but for all of us.

Providing “Medicaid for All” would not change a millionaire or billionaire’s ability to pay for their own insurance, or handle out of pocket expenses.  Assuming, again, by this statement, that the system only works for rich people is hilarious on its face, if you’ve ever worked at a hospital.  Or been rational in your thinking.

And since Bernie seems to forget economic reality as part of his morning wake-up routine (after eating his taxpayer-funded breakfast), let’s remember that the richest people in the United States pay the vast majority of income taxes collected.  In fact, the top 10% of earners pay 70% of all income taxes collected.  And half the country pays no net income taxes, at all.  77.5 million households don’t pay any income tax.  Inevitably, Bernie will want to tap the incomes of the people he seems to hate the most, regardless of how much of a burden they already carry.

So what does Bernie really want?  More power, centralized, in the government, to be controlled by him and the rest of the

Free “Wellness”, America. Step inside. Carefully.

clownshow that thinks it’s qualified to make decisions on your behalf.  When the country drowns in debt and unfunded liabilities, and a recently failed presidential candidate thinks we should double down on that destructive debt strategy, then we clearly have put the wrong clowns in positions of power.

We need new clowns.

 

 

 

The Fallacies of the New Economy

As Vermont’s economy continues down its relentless path toward the ashbin of history, at least, um, several Vermonters are advocating for a “new” economy.  What’s the under-pinning of this new economy?  Innovation?  A removal of existing regulatory overheads so high that the state won’t finish building a road it started three decades ago?  A restructuring of its tax burden to entice businesses to move to or invest in the state, to grow an economy that ranks 2nd worst in the country?  A job climate that doesn’t scare college graduates into leaving the state at one of the highest rates in the country?

Nope.  Instead of those things, a group of concerned Vermonters calling themselves “Vermonters for a New Economy” have decided that the primary answer to the problems above is a bank.

Yep.  A bank.  But not just any bank.  A state bank.  Meaning a bank that is funded, and backed, to one degree or another by public funds (the funding issue is just another one of those thorny details that no one really needs to think about, just yet).  Which means, of course, that any risk or liability falls directly upon the shoulders and wallets of those who pay taxes.

And what is their mission statement?  Their raison d’etre?  Here it is:

Vermonters for a New Economy is a coalition of organizations, businesses, and individuals working to create a new economy for Vermont. You can work with us to design and enjoy the new ways we are owning and operating businesses, banking, exchanging goods and services, financing projects, and earning income.  This work enables us to pursue regenerative economic activities that strengthen our food systems, build renewable energy, reuse and recycle byproducts, and foster creativity, culture, and healthy lifestyles.

I must have missed Banking 101, but I’m pretty sure the bank didn’t ask me about my healthy lifestyle choices when I applied for a mortgage.  They wanted some details around income, liabilities, etc., because they’re crazy like that.  But no mention of how their capital would foster my creativity.  Which is mildly disappointing.  It’s also fantastic that they’re allowing Vermonters to work with these New Economists as to how Vermonters earn their own incomes.

That’s generous of them.

But let’s let the New Economy Vermonters provide more of their own detail, in terms of why they think we need a state bank:

Our Planet —  a VT state bank can provide the game-changing, long-term, low-interest financing that will power a transition to a just and sustainable future

Students — to access low interest education loans.

Homeowners — to get mortgages and home loans from the bank.

Entrepreneurs — who need credit lines, loans, and other forms of finance to help their businesses succeed.

Municipalities – the bank can offer competitive interest on public deposits and lower cost financing for public works.

Taxpayers — who will benefit from both the profits the bank makes and the services the bank offers

Well, that’s quite a bit to digest, so let’s take it one at a time:

1.  Our Planet —  a VT state bank can provide the game-changing, long-term, low-interest financing that will power a transition to a just and sustainable future.
The planet.  So the planet needs a Bank?  How did the planet exist, then, before humans evolved?  Did Gaia patiently wait for first humans to evolve, then banking, in order to provide a high enough state of enlightenment before asking for funding?  Gaia’s patience here with us is considerable.
2.  Students — to access low interest education loans.
You mean like those low interest student loans current and former students enjoyed, courtesy of one of the biggest central banks in the world?  Loans that are at higher rates that mortgage rates, but worse, are also subsidized rates?
The last large effort to nationalize the student loan program fell afoul of the same issues around health care, and that plan has now been shelved.
So the federal government can’t do it, with virtually limitless resources, but Vermont can, now, because of one bank?
In fact, VSAC has said it’s “agnostic” on the idea of a state bank.  So why list student loans as a justification, when the one institution that has historically provided student loans doesn’t see the need?

When the CEO of VSAC says they don’t need additional access to capital, maybe you should remove that selling point from your website.

3.  Homeowners — to get mortgages and home loans from the bank.
You can already get loans from banks, easily – they’ll happily lend you money for a house, or equity loans.  It’s how they make money.  For FHA loans, you only need 3.5% down.  Rates for fixed 30-year FHA loans are well under 4%.  Do Vermonters not know how to apply for a loan, and the state bank will save them from their own ignorance?
And why the incentive to increase – via public funds – the number of mortgage lenders, increasing competition, when, in many cases, the same people who tout this state bank (like Bernie Sanders) want to decrease competition in other markets, like health care?  Why is it a good thing to increase competition in one place, but not the other?
4.  Entrepreneurs — who need credit lines, loans, and other forms of finance to help their businesses succeed.
They can get this already from existing banks and investors.  What would a state bank provide that does not already exist?  Other than offering riskier loans that will be backed by taxpayers?  There’s a federal Small Business Administration that offers many channels for funding.  What would this bank offer that’s not already available?
5.  Municipalities – the bank can offer competitive interest on public deposits and lower cost financing for public works.
Municipalities already have access to funding through banks and bonds.  Like the Vermont Municipal Bond Bank, which has been in place since 1970.  If municipalities already have access to low-interest funding source, why do they need another one?
6.  Taxpayers — who will benefit from both the profits the bank makes and the services the bank offers.
You mean like the benefits current federal taxpayers enjoy, like $20 trillion in debt?  The profit the bank makes is the interest on the loan, which, for the federal government, increases as a percentage of total spending, and if the rates increase, even a little bit, will start to crowd out all other discretionary spending.
Which is really the heart of the matter.  The supporters of the state bank are looking for a way to finance spending now that someone else will have to pay for later.  It’s like giving a college student a credit card with no limit.  Sooner or later that bill will come due, and the people who want to create and support that state bank will then be asking taxpayers to bail it out, just like some other large financial institutions, like Freddie and Fannie.  Which have become, more or less, nationalized.
But the worst of the justifications for the proposed bank’s existence are in its own supporting documents, which make a few claims of fact that aren’t supported by reality.  A few examples (page 6):

Assumptions made reality by simply writing them down.

Sub-prime mortgages are what Fannie and Freddie specialized in, and still continue to be the largest generators of these types of loans in the industry.  Taxpayers had to bail out their poor business practices and the fact that they were understating their sub-prime exposure; there is nothing in the call for a state bank that would prevent this from recurring.
Secondly, citing Vermont’s low unemployment rate as evidence of economic stability means they either a) willfully ignore the reality of Vermont’s declining workforce participation rate, or b) don’t understand what they’re talking about.  If they’re using this conclusion (below) as one of the underpinnings of the justification for the need for a state bank, they’re making a significant error:
 That Vermont’s housing prices didn’t tumble doesn’t mean anything about “integrity” of anything, and neither does unemployment.  As has been repeatedly shown, Vermont’s unemployment is low primarily because the workforce is shrinking, not because of new jobs created.  As the report’s earlier statements argue, correlation does not equal causation.

Well, it does when we argue that the state’s economy is in great shape based on unemployment data. Then it’s ok to make that correlation argument.

If anything, the state’s demographics and the general leveling off of already-high housing prices won’t require a state bank to support increased demand for mortgages.   In fact, the reason housing prices are (relatively) level is because demand isn’t increasing.  There are simply fewer Vermonters looking to buy homes:
Vermont’s economy, and its housing market, are clearly not divorced from national trends. But our housing market seems to be under performing the national housing market, which is worrisome. Over the last two years, Vermont’s housing market, at least measured by prices, has gone nowhere. Nationally, prices are up 7 percent over the same period—not great, but at least it’s a positive number.

One of the reasons for our weak housing market is our underlying demographics. First-time home buyers tend to be in their 30s and early 40s. That’s precisely the demographic that’s shrinking in Vermont. And if there are fewer first-time home buyers, people trying to sell their houses and trade up to more expensive homes can’t find buyers. That clogs up both sides of the home-buying and home-selling market, limiting both sales and price appreciation.

The New Economy site also encourages readers to read the study that justifies the new state bank.  Hilariously, the study recommends that the state not implement a state bank.  That the capital needs are already met.  That the current options available for financing are just fine.  From page 3:

So…we *don’t* need a state bank, then?  Oopsy!

Then what is the purpose of the New Economy site?  To ignore the realities of Vermont’s business climate, Vermonters’ incomes, the demographic changes, and historical policy overhangs that make the state a lousy place to do business?  Another bank won’t fix that.  Another bank can’t fix that.
Only Vermonters can fix Vermont, by dismantling the policies and governmental apparatus that have put them in the place they are today.  If that’s part of the New Vermont Economy, then maybe things will start to change.

Barrynomics: Keynes Unchained

What a difference 8 years can make – if you’re interested in holding public debt.  The Obama administration leaves office just inches away from a $20 trillion dollar debt, when in 2009 that administration inherited $10 trillion in debt.  It took the US a couple hundred years to get to $10 trillion; Obama created almost that much debt in 8 years.

debt-2

Trillion-dollar deficits became the norm from 2009-2012, as “stimulus” spending was touted as the fix to everything that ails the economy.  A question never asked in those conversations might be “If federal spending fixes recessions, and federal spending goes up every year, without fail, why do we ever have recessions?”

Because the answer would be “I don’t know”, and historically there’s no correlation between increased federal spending and increases in GDP – even with federal spending as a component of GDP.  As shown below, federal expenditures continue to increase, debt increases, and GDP bounces all over the place, but in a downward direction.

Finally! Evidence that federal spending fixes everything.

Finally! Evidence that federal spending fixes everything.

In fact, in 2014 it was predicted that the shorter-term positive impacts would inevitably give over to negative growth impacts:

“In contrast to its positive near-term macroeconomic effects, ARRA will reduce output slightly in the long run, CBO estimates — by between zero and 0.2 percent after 2016,” the analysts said in their new report.

They said the cause is all of the borrowing for the $830 billion program, which dramatically boosted the federal debt.

“To the extent that people hold their wealth in government securities rather than in a form that can be used to finance private investment, the increased debt tends to reduce the stock of productive private capital. In the long run, each dollar of additional debt crowds out about a third of a dollar’s worth of private domestic capital,” the CBO estimated.

As icing on the Obama administration’s economic cake, GDP in the 4th quarter of 2016 came in at a whopping 1.9%.  For 2016, the annual rate came in at 1.6%, down from 2.6% the year before, which seems to correlate to the CBO estimates above.  So instead of going out with a bang, Barrynomics goes out with an agonized whimper.

What is interesting, though, is that there’s a correlation between incomes and deficits – but in an unexpected direction.  As deficits get bigger (meaning gov’t spends more than it takes in), incomes decrease, at precisely the time when deficit spending is supposed to improve negative income trends through stimulus spending.

So stimulus spending has a negative effect on incomes? That's not the America Joe "Recovery Summer 2009" Biden described to me. He told me I'd be able to buy a Camaro soon!

So stimulus spending has a negative effect on incomes? That’s not the America Joe “Recovery Summer 2009” Biden described to me. He told me I’d be able to buy a Camaro soon!

The smaller the deficits, the larger the incomes.  The bigger the deficits, the smaller the incomes.  Even if federal spending during recessions is designed to offset income reductions through job losses, etc, it apparently does not have that effect.  At all.

Which runs entirely counter to the basic ideas espoused by Keynes, and that federal spending (including significant deficit spending) could dampen recessionary effects in the short run, and in the longer run help grow the economy.

biden-camaro

Want to go for a ride, big fella?

But there’s no real way to account for the disparate impacts of that spending, which has to grind through the political mill and get disbursed through the bureaucracy via changes to funding, grants, etc, which then has to be actually spent by the receiving agencies.  That spending can’t ramp up to full speed on a dime, and if it’s a larger multi-year project, any benefits of that spending (through new hires and their subsequent income increases, impacting aggregate demand) would be delayed, at best, for an unknowable period of time.

Finally, because the civilian labor force participation rate is at historical lows (below), and seems to correlate to the drop in GDP, it seems that any incentives one has to drop out of the labor force – increases in unemployment benefits, expanded entitlement spending, etc – might have as its final result an unanticipated reduction in economic growth.

A reduction that would apparently come as a surprise to both Keynes and Obama.

 

gdp-and-civ-labor-force

 

Leviathan Shrugged

pacific-rim-kaiju-otachi-more

Hmmm – I wonder what a boat filled with taxpayers tastes like?

As Americans set course on a journey that would net them two presidential candidates who are the least liked in what appears to be all of history, one or two or thirty things come to mind, regarding the general irrelevance of which party wins the presidency.  Let’s start at the top.

It does not matter who the next president is:  Federal spending will continue to grow faster than the pace of inflation, or population growth, GDP growth (even with federal spending as one of its components), or the growth of my 401k.  Just taking the last 25 years or so, what is reliably and consistently growing, so much so that if it were an investment option, people would be buying it like cakes that are really hot?

Spending.  Spending is king.

fed-spend-and-gdp

“But wait!” gasps the Keynesian.  “Federal spending is needed during recessions to jump-start the economy, and reduce unemployment”.

Sure – but those dollars spent come from somewhere, in the form of taxes and borrowing, and when that happens, those dollars aren’t available for capital spending, investment, savings, etc, all of which actually creates jobs in the private sector.  It doesn’t have the net effect of taking dollars from the private sector to spend them via the public sector, which gains nothing, other than votes for office and an increase in the debt and deficit.

Unemployment increases and decreases independent of expenditures - not because of them.

Unemployment increases and decreases independent of expenditures – not because of them.

The reality is that the unemployment rate is more closely tied to the dwindling labor force participation rate than it is to federal spending – which runs counter to the standard Democrat response to any kind of recession, consisting of mostly “let’s spend even more money than usual under the guise of helping”.

spend-unemp-and-lbr-force

Participation rate goes down at roughly the same pace as unemployment, independent of increases in federal spending.

In fact, if you go back to 2000, the labor force starts dropping dramatically when, exactly?  Let me check – ah, that’s right, as soon as Barack Obama assumed the presidency.  That drop in participation accounts for nearly all the unemployment reductions since the recession started.

Recovery 2009 never looked so good! Thanks Biden!

Recovery 2009 never looked so good! Thanks Biden!

But it does, of course, get worse.  If you look at unfilled job vacancies, going back to 2001 – we still have (slightly) fewer unfilled vacancies as of 2015 as we did in 2001 or so.  Yet federal spending doubled during that time.  If you use vacancies – jobs available – as a barometer of growth, we’ve doubled federal spending for no net gain in available jobs.

unfilled-gigs-and-spend

All of which is just another reason why the person occupying the White House can speak to different policies, preferences, and budget priorities, but every year, spending goes up.  The deficits, once deemed unpatriotic due to their size by Obama, yet doubled under his presidency, and the subsequent debt, are just choices being pushed onto future generations.

Or, better stated – a reduction of choices, for them.  Because they will be footing the bill for what we spend now, and they didn’t even get a chance to vote on the lesser of two evils, whoever you might end up choosing to vote for on Election Day.  The less they have to spend, the less free they are, to make their own choices.  We are choosing for them.

In other words, Leviathan, in the form of the federal government, doesn’t care who wins.  Leviathan will continue to feed off the labor of the citizens (those still working, anyway), and the borrowed future earnings of those not even born yet.  The only way to kill this beast is to starve it, and no modern president, or presidential candidate, seems interested in taking that one sane step forward.