Slash Spending and the Economy Will Bloom

For three years, under presidents of both parties, the federal government has pumped trillions of borrowed dollars into stimulus, bailout, and recovery spending. The results have been woeful: Two years after the recession formally ended, the country is mired in a bleak economic lassitude from which it seems unable to rouse itself. Now the wretched news of recent weeks -- feeble GDP growth; painful foreclosure rates; slipping car sales; a drop in factory orders; ever more Americans on food stamps -- has grown even worse.

First, Standard & Poor's reported that home prices have fallen to their lowest level in more than two years, confirming a "double dip" in a housing collapse more severe than the one during the Great Depression. Then came the government's latest employment numbers: only 54,000 jobs added in May, the fewest in eight months, and a rise in the unemployment rate to 9.1 percent. This has been the lousiest recovery in more than 60 years, and by a wide margin. Last week, speaking at the Chrysler plant in Toldeo where the Jeep Wrangler is produced, President Obama tried to put a brave face on things. "There are always going to be bumps on the road to recovery," he said. "We're going to pass through some rough terrain that even a Wrangler would have a tough time with." The audience booed. If that's the reaction Obama's keep-your-chin-up rhetoric gets from a friendly union crowd, how will it play with the rest of the country?

In a new strategy memo, Democratic pollster Stan Greenberg warns his party that voters have lost confidence in Democrats when it comes to the economy, and that harping on the past -- insisting that "Democrats did right and brave things" to promote growth -- will not win votes in 2012. "'The economy' is not the recovery," Greenberg writes, "but a set of powerful on-going realities: a middle class smashed and struggling, American jobs being lost, the country and people in debt. . . . Voters are desperate for leaders who understand the scope of what is happening. . . . They want serious plans, not triumphalism about jobs reports." To Greenberg and other Democrats, "serious plans" to revive the economy presumably don't include dramatic cutbacks in the government's astronomical spending. But what if that spending -- projected to reach $3.8 trillion this year, $1.6 trillion of it borrowed -- is the very thing inhibiting economic growth? Keynesian economists and pundits have argued that what the economy craves is even more stimulus spending and government debt. But history suggests something altogether different. Writing last year in the Cato Policy Report, economists Jason Taylor and Richard Vedder showed that the great post-World War II economic boom was ushered in by the swift rollback of what had been the largest economic "stimulus" in US history. At the time, leading Keynesians cautioned that the abrupt withdrawal of federal dollars would plunge the economy into a new depression.

Their warnings were ignored. "Government canceled war contracts, and its spending fell from $84 billion in 1945 to under $30 billion in 1946," Taylor and Vedder wrote. "By 1947, the government was . . . running a budget surplus of close to 6 percent of GDP. The military released around 10 million Americans back into civilian life. Most economic controls were lifted, and all were gone less than a year after V-J Day. In short, the economy underwent . . . the 'shock of de-stimulus.'" Fearful predictions of massive unemployment -- 14 percent, Business Week said -- never materialized. Far from collapsing, "labor markets adjusted quickly and efficiently once they were finally unfettered." Even with millions of demobilized soldiers re-entering the workforce, "unemployment rates . . . remained under 4.5 percent in the first three postwar years." Workers who lost government-funded jobs quickly replaced them in the surging private sector. "In fact," Taylor and Vedder add, "civilian employment grew, on net, by over 4 million between 1945 and 1947 when so many pundits were predicting economic Armageddon. Household consumption, business investment, and net exports all boomed as government spending receded." America's postwar experience indicates that vibrant growth is generated not by massive government interference in the economy, but by the reverse. The way to revive a gasping private sector is for government to get out of its way, not to choke it with trillions of dollars in new spending. Washington's response to the recession -- unprecedented, intrusive, costly -- has been ruinous. The stimulus hasn't restored the economy to health. The "shock of de-stimulus" just might.

After WWII the US had a robust, massive industrial infrastructure that was capable of producing a lot of what the world and the US needed and wanted. Just a little retooling was necessary - easily done. The US coasted for a few decades on this advantage before the equipment started wearing out and with foreign competition, replacement was not justified. No such luck now.
The circumstances now bear no resemblance to then and require an approach appropriate to the situation as it exists. Phooey on CATO for missing this erroneous presupposition.
We have two political factions, neither of whom are able to propose effective solutions to the situation as they will inconvenience or irritate their base supporters.
Giving free money to ‘employers’ doesn’t work as they won’t hire anyone unless they can use them to cover the cost and a little bit on top. Giving free money to consumers doesn’t work as they will buy stuff from China. Amusingly, the free money in either case is borrowed from China - go figure.

Lowering spending dramatically is a required prelude to lower taxes.

Lowering taxes alone, while leaving the Departments of the Executive Branch to continue to spend, means that within a short time, taxes will be going up. This is why we have to do more than spending cuts, we have to eliminate whole departments completely.

Take the Federal Department of Education. There could not be a more redundant and unconstitutional bureaucracy, so it could be completely eliminated tomorrow and the world would not miss it. Merely cutting it’s budget, but leaving it to exist, means that it’s budget will again one day come back just as soon as Congressman think it is at all possible, politically and financially.

In fact, the economy is reacting to this fact; they know that if there were suddenly a windfall of Federal tax revenue because the economy was booming, even a tiny remnant of a drastically reduced Federal Department of Education would get enormous allocations from Congress as Congress rushed to spend the windfall. And, of course, the windfall would be completely spent, and then spending would continue on beyond the windfall tax revenue back to even higher deficit spending.

This spending continues because Congress can spend without having the cash. This is a key reason why investors are no longer excited about investing in businesses in American because everyone instinctively knows this. This has now gotten to the point that the Federal debt that we’ve amassed over the years is now far larger than can be earned by our population based on our current economy.

Large corporations, financial firms including insurance, pension funds, wealthly people like Jim Rogers, Michael Bloomberg, etc., basically any entity that has a big pile of assets unfortunately now all believe that America’s days as a good investment are past, that China and the developing world is the best “growth” investment. They largely invest in hedge funds that are only open to “accredited” investors, meaning those with a high enough net worth or income that Congress feels that they don’t need to be “protected” from unwise investments. Often they will invest with “private equity”, i.e., a private company that just invests in things and is relatively uninhibited in what it can invest in because everyone involved is accredited. Pretty much, everyone in the investment world wants to many your money if you have a big pile of it. Unfortunately, a tidal wave of this money is being invested in China. So not only is the manufacturing of the the socks, shirts, lawn mowers, iPads, and everything else you buy that is made in China been bought from China - the money in your 401k and pension fund was actually used by the Chinese to leverage their building of the manufacturing plant, property and equipment that made them.

Try going to a Private Equity firm to look for investment from them - tell them you’re want to start a company that makes lawn mowers and locate it here in the U.S. Sorry Charlie, all our money is invested in China.

Jim Rogers cries out sad it is that no one wants to be a farmer in the U.S. any more and he’s making sure his kid learns to speak Chinese. A lot of Jim’s money is invested in China. What he never mentions is that if it’s too costly to buy Real Estate for farming in America - why is farming done in California, a state with very high Real Estate values relative to the rest of the country ? And, apparently, Real Estate values are dropping like a rock here in the U.S. Answer: Jim has just given up on America because he thinks our economy has no growth left in it.

One point is missing in this article: in 1946 there were FAR fewer legal requirements of businesses, in Municipal, County , State and Federal law and regulations. In 1946 one could buy a truck and a digging machine and start digging septic tanks, for example. Today, that same aspiring digging entrepreneur would be faced with an enormous barrier to entry called regulations.

More on this in other posts elsewhere...

My grandfather used to point out that in its heyday Sears would find American companies with excess production capabilities and pay them to use that excess to produce their product to be marketed under the Sears label. Much of what you bought with the Sears label was the very nearly the same product you could buy under its name brand label. They would help companies level out demand over the year by keeping them busy in the off season for their products.

Doing that on a national basis helped everyone in the cycle. It's not longer possible now that so much of what they sell, and we buy, is no longer produced by American workers.

Granted, it's a great deal more complicated than this simple explanation, but an awful lot of what ails us these days is that we no longer produce what we consume. That would not be as much of a problem if the outsourced producers had the same expense to produce as our producers, but when you have the huge differences in labor cost and regulations that now exist between the US and a third world countries something’s got to give.

"..Giving free money to ‘employers’ doesn’t work as they won’t hire anyone unless they can use them to cover the cost and a little bit on top.."

While I don't disagree with your basic point (economic landscape significantly different now than it was post WWII), the way you phrase the above sentence gives me pause as to what you mean by "giving free money" to employers. While I am firmly opposed to "bailouts", allowing businesses to keep more of their gross income (or put another way, refraining from TAKING so much of the business income) is not "giving free money".

Many "pro-growth" economists would acknowledge that it would be an economic boost to adopt policies that would help businesses reduce their cost of doing business via reduction in capital gains (and other) taxes and reducing/alleviating certain regulatory burdens imposed by our governments at several levels.

It's not a matter of whether such policies would boost the economy, imo, but of just how much it would boost the economy.

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