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The
Economy Through the Eyes of the
Opposition
by Armstrong Williams
Dec 29, 2011
Naturally
I disagree with much of the
opposition and my well-meaning colleagues on the left in regards to
Keynes and
his school of economics. Many in this school of thought cannot accept
the fact
that Keynesian economics has never worked; it did not work in the
depression
nor has it worked any time since then. The only time stimulus has
“worked” is after
the economy has already recovered and then becomes overheated by the
stimulus.
Keynesian economics is an excuse for politicians to buy off special
interest
and voters with other people’s money. Let me address some of the
opposition’s
specific points.
First,
stimulus spending creates jobs.
False: stimulus spending financed by taxes substitutes relatively
inefficient
government spending for private spending, in other words government
spending
“crowds out” private spending. The opposition may disagree that public
spending
is less efficient but the recent analysis of the government spending
does not
support their point of view.
Second,
many will tell you that it is
not taxation but debt that is financing the government spending; thus
it is not
crowding out private spending. I maintain that government debt crowds
out
private borrowing and investment. Many of my anti-capitalist colleagues
say
that government spending is not crowding out private investment because
interest rates are low. Therefore there is plenty of money to finance
private
investment. Unfortunately, in an attempt to protect depositors, and the
government guarantee of such deposits, the bank regulators have
increased the
credit underwriting requirements on banks. Consequently, they are not
lending
to small and medium sized businesses.
Interest
rates are low because the Fed
is printing money and as a result significantly increasing the money
supply
thereby making money less expensive. The irony of artificially low
interest
rates is that it reduces the income of pensioners and savers. This in
effect
shifts money and consumption from savers and transfers it to the
government who
is borrowing at artificially low rates.
The
business community realizes that
the increased money supply is financing government spending and the
private
sector must eventually pay the piper. Consequently, the business
community is
not investing as much as it might because it is concerned about
inflation and
higher future taxes to pay for the borrowing. Since business investment
takes
time for a return, the business man making an investment now expecting
a return
2 or 3 years from now knows that his taxes are going to be increased
with the
expiration of the Bush tax cuts and the 3.8% new Obama care tax on
unearned
earnings. Thus the businessman is not investing today because he knows
his
return is being significantly reduced 2 years from now.
Third,
their argument of skyrocketing
business investment is based on historically low investment in 2009
created by
the worst recession since the Great Depression. Investors in 2011 are
merely
“catching up.” Investment is not above the trend line.
Fourth,
the left’s idea to stimulate
the economy through a tax credit for firms that increase employment
shows a
fundamental lack of understanding of why companies increase employment.
Jobs
are a by-product of increased sales and revenues. Companies do not like
to hire
employees. They are expensive, require management and cannot be easily
laid off
in the event of incompetence or loss of business. Companies increase
employment
because they have additional business that needs to be processed, and
they
cannot process it through overtime or increased capital. No businessman
in his
right mind would hire someone merely because labor is 10% cheaper
because of
tax credits. He would only increase employment if that is his only
alternative
to process additional business. If he has additional business, then he
will
hire additional employees regardless of the 10% credit. Therefore the
credit is
an inefficient way to increase employment and waste of taxpayer money.
Fifth,
their plan for a serious budget
reduction in the future does not work without a big initial down
payment in
spending cuts. Today’s Congress cannot bind future congresses, and
Congress has
been notoriously unreliable with respect to the fiscal management of
the
country’s finances. Only a naive observer of America’s today’s
political
environment could believe that congress will constrain spending to
bring the
deficit under control when the economy improves. The only point that
the left
may have is that fiscal stimulus may have a small temporary benefit
when the
money is originally spent, but the extent of the benefit depends on how
the
money is spent, e.g. infrastructure, tax rebates, government program,
etc., and
technical arguments about the multiplier effect of the spending.
However, it
has a negative impact when it is finally paid for.
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