Increased Government Spending Won’t Fix the Economy


Using government money (our money!) to “create jobs” sounds great, doesn’t it? When you hear about massive layoffs, a proposal that create jobs sounds appealing. But this really isn’t the way to stimulate our economy. The government will spend far too much money creating far too few jobs, when the real way to get ourselves out of this financial mess is to create incentives for long-term growth. (Read: Lower taxes and create a situation in which businesses and consumers can thrive.)

Downsize DC offers the following educational information on the right way to stimulate (fix) the economy:

The politicians want to prop up businesses by stimulating consumer spending. One-time tax cuts will not accomplish this.

Milton Friedman won the Nobel Prize for showing that consumers don’t spend based on short terms gains, but only on expectations of what their long-term income will be. This fact was validated yet again by the fate of the recent “stimulus” checks the government mailed to everyone. Most people did not spend this money, they saved it or used it to pay down debt.

If the politicians really want to stimulate spending they should pass permanent tax reductions.

The politicians claim this would add too much to the deficit. They could solve this problem by cutting spending — by Downsizing DC. But the politicians claim we need increased government spending to substitute for reduced consumer spending. Several recent studies indicate that there’s little evidence to support this theory.

The politicians promise that this stimulus program will be different. They’re going to focus on building productive new infrastructure that will aid economic growth. But how do politicians know what will be productive and what will not? And why should we believe that this massive spending won’t be junked up with pork and corporate welfare?

Daniel J Mitchell of Cato Institute makes the following points . . .

* The jobs the stimulus package is supposed to create will cost about $280,000 each, assuming the jobs materialize (this is according to the calculations of Greg Mankiw at Harvard)
* The true cost of these jobs will be even higher because we must also include the “opportunity costs” of what could have been done with the money instead
* To the extent the new jobs are government jobs the cost could be even higher. The Bureau of Economic Analysis calculates that federal employees earn nearly twice as much as private sector workers.

In addition, the money for the stimulus package must be borrowed, which will add long-term interest costs.

All of these concerns disappear if the government doesn’t spend the money, and instead leaves it in the private sector.

The politicians could stimulate businesses to use this money to create new goods and services, and consumers to feel confident about being able to afford these goods and services, by cutting regressive forms of taxation permanently. The politicians should immediately eliminate the . . .

* Capital gains tax (which discourages investment),
* Corporate tax (which is merely passed on to consumers),
* And reduce the regressive payroll tax, which does not need to be so high in order to pay for current entitlement expenses

Permanent tax reductions would . . .

* Make new investments and businesses profitable
* Convince consumers that their incomes will be higher for the long run
* Increase investment, job creation, and consumer confidence

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