Fed Gov’t Won’t Restrain Spending

Published February 28, 2018

In February President Trump proposed a $4.4 trillion budget for 2018 and projects a budget deficit for 2019 almost double his estimate last year. Mick Mulvaney, director of the Office of Management and Budget says, “Mr. Trump has now given up on balancing the budget over the next decade.” Instead, he proposes to increase the deficit by $7 trillion over ten years with no balanced budget in sight.

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.

Adminstration’s Projected Unemployment Rate 
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.

[Originally Published at American Liberty]