But Now You Know

The search for truth in human action

Why Stimulus Spending Depresses the Economy


There is a good reason why Bush’s “economic stimulus” plans helped land us in economic depression, and why Obama following that precedent with bigger, badder stimulus plans will do even more harm.

It is the same reason why Japan’s “stimulus plans”, upon which ours were partially based, kept them in an economic depression for a decade, and did the same thing in Sweden.

Here’s How

  • Lost Money: Every penny spent is taken from the private sector: whether through taxes; or by borrowing that robs from private investment, so nothing is gained. Then that money is wasted before it’s spent, because of the cost of bureaucracy, red tape, political motivation, and the lack of any control over the benefit of what it’s spent on.
  • Crowding Out: The government spending competes with private spending, but has no checks or balances, no responsibility, so that it can crush the private competition out of the market, causing more economic harm instead of helping. It hires away workers and managers with large budgets, yet contributes less. It draws away research and investment from the private sector, et cetera.
  • Chilling Effect: Healthy private investment and behavior is seen as punished, as unconditional public spending displaces it. Government spending tends to reward failure, and not to create wealth, while private spending depends upon productivity and success to expand. Bad companies, which do not contribute enough to society to justify their existence, have their ineffective ways perpetuated, instead of being excised and replaced with new competition.

Lost Money

Your Neighbors

1194819_old_windowYour neighbors are planning to upgrade all of their crappy single-pane, wooden windows to nice thermal-pane replacement windows.

(Don’t ask how I know, just work with me, here…)

Your neighbors, therefore, shall cause the full employment of a team of six carpenters/installers, for one week. And those workers will, in turn, use their pay in ways that end up rewarding others, by spending or investing.

Of course they’ll also be profiting the company that sells windows, which in turn will reward its suppliers by ordering more, et cetera.

Your neighbors will, too, have nicer windows. Their house will be more comfortable. They will save money on their energy bills. And, if they are Global Warming True Believers, they will also feel very good about their effort to save the earth.

All of this benefits society and the economy. Even the feel-good parts.

Big Brother

But perhaps your neighbors will be prevented from doing this, by Big Brotherment.

Maybe their taxes are, or will be, high enough that they won’t be able to afford to buy those thermal replacement windows.

Perhaps, in fact, the amount necessary to upgrade their house will, in fact, be spent on a Stimulus Package, funded by their taxes.

That tax money, instead of being spent on their house, will instead filter through the government bureaucracy. The majority of it will actually be paid to bureaucrats, who produce nothing but paperwork and rules.

What’s left, in theory, will go to some union contractors in Iowa, to finance a Corn Museum. Never mind that Corn makes more money for its producers than any other crop, the government is financing this to “stimulate” the economy.

So a team of three union carpenters will get paid for about five days, based on your neighbor’s tax money. Three, because a majority of the money was lost to red tape, and only five days, because the union monopoly dominating the government contract in question is overpaid.

Better still, once their hourly coffee breaks and four mandatory half-hour breaks are deducted, and you take into consideration the bizarre “safety” rules in their contract, that leave them standing around more often than working, what you will actually get is about the amount of work one carpenter’s could do in five days.

And it will be dedicated to building the 23rd corn museum in the United States.

So the options are:

Free Market

  • Your neighbors get a house full of thermal windows.
  • Six carpenters get fully employed for a week.
  • A window company is rewarded for improving the lives of your neighbors.
  • Money is saved on energy.
  • The planet is no longer doomed.

Government Stimulus

  • Iowa gets 0.01% of a corn museum.
  • Three carpenters get employed for five days, to do the work of one carpenter.
  • People may, if the project is ever finished using other people’s tax money, get to save an hour over driving to the privately funded corn museum next door in Illinois.

Now a government bureaucrat will, in defense of his precious Pork budget, say “but we can’t be sure your neighbor will buy thermal replacement windows!”

But, quite frankly, we can be just about 100% certain that they will spend it on something they value. I’m not entirely clear on how even pet rocks and full body massages would be any less of a contribution to the economy than another corn museum.

And, seriously, much of the government’s spending benefits society less than corn museums, too.

Bridges to nowhere, two thousand dollar toilet seats, military equipment the generals said they didn’t want, but some senator insisted on funding because it is built in his state, methadone for junkies that is more addictive and toxic than the heroin it is replacing, free benefits for illegal aliens…

Face it, the corn museum was actually an optimistic example of government benefiting society.

Ultimately, each dollar the government spends must come from a dollar ALREADY taken from your pocket, directly or indirectly. There is no stimulation, because it’s just the same dollar. And, worse, YOU would have bought something you felt was beneficial, not wasted it on some bureaucratic make-work project.

Crowding Out

(caption: Buying stuff on closeout from a bankrupt company helps the economy far more than a government check)

(caption: Buying stuff on closeout from a bankrupt company helps the economy far more than a government check, regardless of whether it saves the bankrupt company)

And let’s not forget that the government’s spending competes with private spending. There is a pressure against private industry, when it’s forced to compete with a government that can forcibly finance a project without any standards for success.

Workers

As noted above, if you are a carpenter, you can get a job where you are paid for what you accomplish, in the private sector, or you can get a job in a government contract where a union monopoly guarantees you more pay, for less work, a coffee break every single hour, and you’re not actually expected to even succeed, or do good work.

With government spending, therefore, one ends up with fewer skilled workers in the private sector.

Research

Better an easy government research job with no results required except regular publication of results, than private sector research, that must actually prove some contribution to society.

This is why things like cancer research and alternative energy research have produced only insanely expensive, ineffective results.

Business

Why build a privately financed corn museum, when there is a public one planned nearby? The free market depends on the pressure of demands, which can be supplied because of the reward of profit, fame, et cetera. All of which is quashed by public competition…producing LESS economic activity, prolonging, or even creating, economic downturn.

Investment

This is even true of investment. Why risk money buying stocks, or investing in any other resource that actually helps create wealth and grow the economy, if the government is issuing trillions in bonds that it can guarantee, at gunpoint, it will be able to afford to pay off?

This is part of why the US stock market is below where it was a dozen years ago; the past nine years of massive growth in government spending have crowded out even investment, depressing economic growth and the availability of money for business and individual use.

Chilling Effect

1164432_carpenter_series_1Capitalism helps society prosper, in part, by requiring that businesses be efficient and useful, or else be displaced by other, better, more efficient competition. Government “stimulus” spending helps bad behaviors and inefficient companies survive, preventing the openings for new, better ways.

Reward Failure

Government spending, too, has to reward failure and punish success, directly. Not just by bailing out failures, but with its own agencies: It would be irresponsible to expand the budget of a project that was already coming in ahead of schedule and under budget. What a waste of taxpayer dollars! Instead, if the agency wants to expand its budget, it must fail. It must show how it is over budget and behind schedule, and how natural this is, how more money and power will help it achieve its goals.

Punish Success

Meanwhile, responsible, productive businesses are punished for their contribution to society.

What if Ford ends up the weakest of the three automakers, because it didn’t take the thirty billion taxpayer dollars and declare bankruptcy? What does this tell companies in other industries, when they’re considering whether to be productive, or else squander money and go crying to the stimulus committees for bailouts?

Government Gangrene

There are hundreds of billion dollars in bad investments, loans, et cetera, that need to simply fail, because they cannot ever be productive. Right now they are gangrene on society’s body, just burdening our health and slowly spreading…but the stimulus/bailout money keeps them from being removed, and even helps them expand, quashing healthy alternatives.

The Solution

In each case, around the world in history, the only way to get out of economic depression was for the government to STOP killing the economy with its fake “stimulus” packages.

Examples

It took Japan and Sweden ten years to figure this out. Some other countries never have, and still are suffering for it.

Even in the US, the government constantly expanded spending to “stimulate” from 1929 through 1938, and only truly enjoyed healthy economic growth when spending and regulation were massively cut in the late forties and fifties.

The opposite of this was the depression of 1920-21, where banks failed, commodity prices plummeted (like housing prices now), the stock market crashed…and the US government did virtually nothing.

That lack of “stimulus” resulted in a depression less than two years long, unlike the decade of the other examples.

Check out the extensive history of economic downturns in the US, for more.

Self-Transfusion?

Ultimately, government spending actually sucks the life out of the economy, increasing and prolonging economic depression, because it must take private money in order to “spend” the public money…as if you gave yourself a blood transfusion by taking blood your left arm and putting it in your right…with the stress of the transfusion actually leaving you weaker than when you started.

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July 15, 2009 Posted by | Economy, Politics | , , , , , , , | 14 Comments

Unemployment Benefits INCREASE Unemployment


The recent increases in unemployment benefits, rather than helping fight unemployment, have actually increased unemployment dramatically 

 

The recent increases in unemployment benefits, rather than helping fight unemployment, have actually increased unemployment dramatically

Subsidies Cause Surplus

If you wanted to have too many apples, you could simply get the government to pay billions of dollars to apple growers. You can do this with almost anything; it’s called a subsidy.

Aside from the many problems intentional subsidies always cause, there are many “unintentional” subsidies. Perhaps the worst of these is the unemployment subsidy.

When you give people money for each apple you grow, more people choose to grow apples, and apple growers choose to make more. It creates an imbalance, producing more apples than the society really finds worthwhile.

When you give people money based on how unemployed they are, you likewise cause more people to be unemployed, and people to be unemployed longer. I don’t even need to go into how that creates an imbalance, as (unlike apples) more unemployment is obviously, universally, bad.

Some people, mostly those who have little real-life experience (like a Kennedy or Bush family member) might say “But nobody would CHOOSE to stay unemployed, just for benefits”.

Second, they’re wrong…but I’ll get back to that.

First

FIRST, it doesn’t matter if nobody does it on purpose. When the Fed raises interest rates just 0.25%, fewer people buy houses. Not one human being actually says “I am not buying this house, because the Fed raised rates by a fraction of one percent”.  It isn’t even raising home loan rates (it has no control over those), just the rate at which it lends to banks. Yet the trickle-down effect is fewer homes bought, in part because home loan rates creep up a tiny bit.

The same is true of unemployment. There is a trickle-down impact, over the span of 300,000,000 people, where some stay unemployed longer, and more BECOME unemployed, because unemployment is subsidized. As even a tiny increase in home loan interest rates invisibly pushes a few people over to the side of not buying a house, an increase in unemployment subsidy pushes a few people over into being unemployed.

Over the span of hundreds of millions of people, that is dramatic, in both cases.

And now we can get back to “second”:

Second

The ivory tower “nobody would choose to stay unemployed” people are wrong.

People DO choose not to work because they know they have an unemployment buffer.

They choose not to work as hard or otherwise volunteer to be the one laid off, choose not search as hard, pass up jobs they would otherwise take, and even actively stay unemployed, because of the unemployment benefits.

We who have real-life experience probably ALL, right now, know people who are doing this. Many of you, in fact, probably have done it. I am a consultant, so I don’t get unemployment benefits, but I’m sure it would influence me if I did.

I certainly have friends who actively cite the unemployment benefits as allowing them to take their time working. I even know someone who says they are glad the benefits have been extended, as they will be able to go for a year without looking for a job, now.

Sure, most states have some sort of fake attempt to require people to look for and take jobs. But there’s no way to actually make this work. It would cost more than unemployment benefits provide, to actually verify all the claims people make on their “looked for a job” forms. And any cheaper means of proving it would be draconian against all the people who were honest.

The Unemployment Subsidy

So yes, that’s exactly what the Liberals’ unemployment extension has done:

Increase unemployment, by subsidizing it.

We will have higher unemployment rates, and suffer this depression longer, because of the benefit increases. Yet another example of government’s coercive “help” making the problems they attack worse, instead of better.

April 3, 2009 Posted by | Economy, Family, Politics, Society | , , , , , , , , | 7 Comments

Trickle-Down Taxation


2. A heavy progressive or graduated income tax.

Item #2 of the Communist Manifesto: "A heavy progressive or graduated income tax". What isn't mentioned is that this was a way Marx could make the poor even poorer and weaker, not the rich. Marx gained power from the strife caused by poverty.

One of the best-sounding of the freebies that Obama is offering to hand out (if it’s not just another politician’s empty campaign promise) is exempting everyone who makes under $200K from the income tax. This one even tempts me. Lower taxes are good for the economy, for economic freedom, and of course for everyone who earns less than that amount of money.

But there’s a serious down-side to this. How do we fund all of the other freebies he is giving out, if we are going to cut government tax revenue with this one?

Of course the answer is simple: We are going to tax the people who make OVER $200K so much more that it makes up for the loss. Obama says it’s only fair, to “spread the wealth around”.

Now this may not be quite as bad as it sounds:

  • First, people who make over $100K or so pay most of the taxes, already. Unfortunately, Bush’s tax cuts were not really all that “for the rich”, and “wealthy” people already pay almost all of the taxes. It was pointed out today that there are some companies, in fact, that are forced to pay more taxes per year, individually, than 66% of all families. It’s famous that the top two percent of earners pay something like 60% of the taxes.
  • Second, tax cuts boost the economy, which increases tax revenue. Both Reagan and Kennedy both demonstrated this, cutting and simplifying taxes, and having tax revenue increase.

Unfortunately, those two things aren’t enough. The billions paid by people who earn less than $200K still adds up…and tax cuts don’t all work equally well.

For example, tax cuts that favor one group over another help the economy less, while ones that spread the burden evenly help everyone more. In fact, simply spreading the burden evenly, with NO tax cut, would boost the economy more than cutting taxes for some people, while raising it for others.

Especially when the taxes (as they already, are, and will now be more) are designed to punish hard work, success, and contribution to society.

Just as a slight increase in interest rates, so small it certainly doesn’t change any one person’s mind, has a large nation-wide impact on how much people borrow, so a tax that increases as you earn more money has a nation-wide impact on how much people earn, depressing income growth.

But there’s something involved, that’s more important than ALL of that:

WHEN Barak Obama raises taxes on people who earn more money, the wealthy will not pay a penny of it.

You will.

The counterpart to trickle-down economics (which points out that wealthy people who earn more money spend and invest more, allowing all of society to become more wealthy) is…

Trickle Down Taxes

When you raise taxes on the rich, they ALWAYS respond to defend their wealth. The more money and power they have, the better they can do this. They can give themselves raises, pay accountants to shelter their income, or otherwise make up for the new tax.

But where do they get the new money, to pay themselves enough to make up for the taxes?

From you.

Wealthy people and companies can, for example, raise prices to pay themselves enough extra to make up for the taxes. Guess who pays the higher prices.

They can also cut jobs or pay among their employees, in order to make enough to pay themselves more. Guess who the employees are.

Along with those two tools of passing along higher taxes, the rich and powerful can cut quality of products, again to save for themselves. Ice cream that was once two quarts is now 1.5 quarts, and the same price. Check Edy’s and Breyer’s, next time you’re shopping. Guess who ends up paying for all the reduced-quality/quantity food. Not the rich guys…the can afford to pay a premium for consistent quality.

Ultimately, ALL costs the government imposes on the wealthy, they pass down to you.

Oh, but the tax trickling isn’t done, yet.

If They Lose, You Lose More

Let’s say you, somehow, manage to force the wealthy and powerful to pay for their own taxes.

You are now shutting thousands of people out of jobs, and, causing more hunger and poverty.

Why?

Because the wealthy don’t put their money in giant Scrooge McDuck vaults, to play in while they cackle wickedly. Instead, they either spend or invest it. Spending it creates jobs directly. If they buy a car, someone built it, someone shipped it, someone sold it, people repair it, people clean it…maybe someone even drives it as their job. The less money ANYONE spends, the less work there is. But, let’s face is, the wealthy have more money, per person, than other people, and therefore supply more jobs with money.

Poor people have to mow their own lawns (if they have them). Middle class people may be able to pay someone to mow their lawn for them. A few dozen families might, between them, manage to keep one lawncare guy employed. But one wealthy dude may employ a half dozen lawn guys, all by himself. 

Take away his money, and the rich guy may have to lay off his lawn people…perhaps one hundred times the job impact of a middle class person having to stop hiring a lawn guy.

But most of a wealthy guy’s money is not spent, so it doesn’t make jobs.

Well, not directly.

Investment Creates Jobs

Instead, it gets invested. Invested money, of course, goes directly to creating wealth. That’s the whole function of investment…the reason that the investor gets more money back. The creation of wealth actually creates MORE jobs than spending money directly. This, in fact, is what actually drives employment, in general. Without investment, we really would “run out of jobs”. The economy would stagnate, and we’d end up like Communist China was, before they went “capitalist”.

The “capital” in capitalism is investment.

Rich people and companies are the reason most new jobs ever get created at all, because it requires investment to build the factory, or store, or restaurant, whatever it is. Even when poorer people start their own successful business out of pocket (something pretty rare, because of government regulation and taxes), they only create large numbers of jobs as they become successful and rich.

One of the many reasons the economy is so weak, now, is because investment is so rare, thanks to punishment of investment through taxes, regulation, deflation, and the preference for stagnating money shelters like bonds and treasury notes, over the stocks to which government has proven to be so hostile.

If we are to get back on the road to economic growth, we must first get on the road to economic freedom for all, including the wealthy, who just happen to pass on ALL effects we try to have on them, good or bad.

December 3, 2008 Posted by | Economy, Politics | , , , , , , , , , , | Leave a comment

   

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