At Just One Year Old, Stimulus an Overgrown Drain on the U.S. Economy
On the first anniversary of the stimulus bill’s passage, administration officials are traversing the country (on the taxpayer dime) touting its alleged successes.
But the inconvenient truth is that no number of orchestrated press events can mask the threat massive deficit spending poses for future living standards.
What administration officials are calling “investment” is really the opportunity cost of the government borrowing resources out of the economy. As a result, to the degree there has been any “stimulus,” it has been in the stimulation of government jobs and debt.
It is the private sector that fuels job growth and wealth creation, whereas government spending necessarily comes at the private sector’s expense. Fortunately, it appears that a growing segment of the populace is beginning to understand that there’s no free lunch when it comes to government spending.
How to Tell When ObamaCare Is Dead
Democrats have lots of ambitions. One of them is their health care overhaul, which included a lot of “pay-fors” — i.e., spending cuts that would pay for ObamaCare‘s new entitlements. But they also want a jobs bill, a “doc fix,” and other things that require new government spending. Those also require pay-fors — unless Democrats are willing to expand further a $1-trillion-plus deficit — and pay-fors are a scarce commodity.
Today, CongressDaily’s Anna Edney reports:
Some, though, are skeptical Democrats would use any of the pay-fors because that would mean officially declaring the reform effort dead.
“I don’t expect any effort to dismantle the reform bill until there’s no pulse,” one lobbyist said.
Right now, ObamaCare is mostly dead. And as we all know, “There’s a big difference between mostly dead and all dead…Mostly dead is slightly alive.”
A good way to tell when ObamaCare is all dead is when Democrats start picking at the carcass for pay-fors.
There Is Some Budget Good News, but It Is Actually Really Bad News
The Office of Management and Budget has released the President’s FY2011 budget and the Congressional Budget Office has released its semi-annual Budget and Economic Outlook. Much of the coverage of these documents has focused on deficit numbers. This is not a trivial concern, particularly since the Bush-Obama policies of bigger government have dramatically boosted red ink.
But the most important numbers in the budget documents are the estimates of what is happening to government spending. The good news is that burden of government spending is projected to decline over the next few years from about 25 percent of GDP to less than 23 percent of GDP.
That’s the good news. The bad news is that federal government outlays only consumed 18.2 percent of economic output when Bush took office. In other words, notwithstanding the good news cited above, the size and scope of government has increased dramatically since 2001. The worse news is that the long-run spending forecasts show a cataclysmic expansion in the burden of government. The “optimistic” estimate is that the federal government will consume more than 30 percent of GDP by 2050 and 40 percent of GDP by 2080.
Karl Rove’s Spending
Former George W. Bush adviser Karl Rove enjoys complaining about the spendthrift ways of President Obama and the Democrats. But I noted in a Wall Street Journal letter today:
Annual average real spending grew faster under President George W. Bush than any president since Lyndon Johnson… Even leaving out defense, President Bush was the biggest spender since Republican Richard Nixon.
My letter pointed to two prior op-eds by Rove, but he was at it again yesterday in the Journal. He said that his former boss “cut in half the growth of discretionary domestic spending from the sizzling 16 percent rate of President Bill Clinton’s last budget.” Call me crazy, but I don’t think supporting domestic spending growth of 8 percent during a time of very low inflation is an acheivement to crow about.
Over at National Review, Veronique de Rugy apparently gets just as annoyed as I do hearing big-spending Republicans complain about big-spending Democrats.
Mr. Rove’s columns are usually very interesting, but I’d like to see him accept at least some of the blame for the exploding size of government during his tenure at the White House.
How the Washington Post Covers Education
Yesterday, the president proposed yet another big increase in federal education spending. The Washington Post quoted ”senior White House officials” as saying that the spending would boost “the nation’s long-term economic health.”
I sent the story’s authors a blog post laying out the evidence that higher government spending hasn’t raised student achievement, and that if you don’t boost achievement, you don’t accelerate economic growth.
Today, there is an updated version of the original WaPo story. It no longer mentions the stated goal of the spending increase. It doesn’t mention that boosting gov’t spending has failed to raise achievement, and so will fail to help the economy.
But it does cite a single non-government source for comment on the president’s plan: the Committee for Education Funding. The Committee is described by the Post as “prominent education advocates,” and as an organization that “represents dozens of education groups.”
Here’s how the CEF itself measures its accomplishments: “The… Committee [has] been very successful in championing the cause of increasing federal educational investment. Through strong advocacy… [it has] won bipartisan support for over $100 billion in increased federal education investment over the last five years.” Its members, if you haven’t guessed already, include virtually every public school employee organization you can name, including, of course, the national teachers unions.
That’s the source, the one source, the Washington Post asked to weigh in on a new federal education spending gambit.
I asked the author of the revised version of the story to comment for this blog post. At the time of this writing, I’ve received no response.
State of the Union Fact Check
Cato experts put some of President Obama’s core State of the Union claims to the test. Here’s what they found.
THE STIMULUS
Obama’s claim:
The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. That’s right — the Recovery Act, also known as the Stimulus Bill. Economists on the left and the right say that this bill has helped saved jobs and avert disaster.
Back in reality: At the outset of the economic downturn, Cato ran an ad in the nation’s largest newspapers in which more than 300 economists (Nobel laureates among them) signed a statement saying a massive government spending package was among the worst available options. Since then, Cato economists have published dozens of op-eds in major news outlets poking holes in big-government solutions to both the financial system crisis and the flagging economy.
CUTTING TAXES
Obama’s claim:
Let me repeat: we cut taxes. We cut taxes for 95 percent of working families. We cut taxes for small businesses. We cut taxes for first-time homebuyers. We cut taxes for parents trying to care for their children. We cut taxes for 8 million Americans paying for college. As a result, millions of Americans had more to spend on gas, and food, and other necessities, all of which helped businesses keep more workers.
Back in reality: Cato Director of Tax Policy Studies Chris Edwards: “When the president says that he has ‘cut taxes’ for 95 percent of Americans, he fails to note that more than 40 percent of Americans pay no federal incomes taxes and the administration has simply increased subsidy checks to this group. Obama’s refundable tax credits are unearned subsidies, not tax cuts.”
Visit Cato’s Tax Policy Page for much more on this.
SPENDING FREEZE
Obama’s claim:
Starting in 2011, we are prepared to freeze government spending for three years.
Back in reality: Edwards: “The president’s proposed spending freeze covers just 13 percent of the total federal budget, and indeed doesn’t limit the fastest growing components such as Medicare.
“A better idea is to cap growth in the entire federal budget including entitlement programs, which was essentially the idea behind the 1980s bipartisan Gramm-Rudman-Hollings law. The freeze also doesn’t cover the massive spending under the stimulus bill, most of which hasn’t occurred yet. Now that the economy is returning to growth, the president should both freeze spending and rescind the remainder of the planned stimulus.”
Plus, here’s why these promised freezes have never worked in the past and a chart illustrating the fallacy of Obama’s spending claims.
JOB CREATION
Obama’s claim:
Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed. 200,000 work in construction and clean energy. 300,000 are teachers and other education workers. Tens of thousands are cops, firefighters, correctional officers, and first responders. And we are on track to add another one and a half million jobs to this total by the end of the year.
Back in reality: Cato Policy Analyst Tad Dehaven: “Actually, the U.S. economy has lost 2.7 million jobs since the stimulus passed and 3.4 million total since Obama was elected. How he attributes any jobs gains to the stimulus is the fuzziest of fuzzy math. ‘Nuff said.”
Monday Links
- The massive impact government spending has on job creation.
- Why climate change spurs whining about cold snaps.
- Beware the “Crusader Temptation”: “Afghanistan has become a target of aggressive pro-war activists in America, including feminists who believe in waging war to improve the status of women.”
- What happens when the only self-identified socialist in the U.S. Senate starts to look moderate when compared to his colleagues?
- Podcast: “Bush’s Budget-Busting Binge,” featuring Chris Edwards.
Pinocchio Rove Strikes Again
George Bush ranks as one of America’s most fiscally irresponsible presidents. He increased overall spending from $1.8 trillion to $3.5 trillion and most of that new spending was used to create or expand domestic programs (no-bureaucrat-left-behind education spending, pork-filled highway bills, sleazy Wall Street bailouts, corrupt farm spending, new Medicare entitlements, etc.) that are not legitimate functions of the federal government. So it is galling to see his former senior adviser writing columns complaining about Barack Obama being a big spender. Many of the criticisms about the Obama Administration in his latest WSJ column are correct, to be sure, but Karl Rove has zero moral authority to make those arguments. Moreover, Rove once again engages in sloppy or dishonest (you choose) analysis by blaming Obama for some of Bush’s mistakes. In the excerpt below, he blames Obama for any of the Fiscal Year 2009 debt that was incurred after January 20 of last year. But as I’ve already explained, 96 percent of the spending in FY2009 is the result of Bush’s policies:
Consider that from Jan. 20, 2001, to Jan. 20, 2009, the debt held by the public grew $3 trillion under Mr. Bush—to $6.3 trillion from $3.3 trillion at a time when the national economy grew as well. By comparison, from the day Mr. Obama took office last year to the end of the current fiscal year, according to the Office of Management and Budget, the debt held by the public will grow by $3.3 trillion. In 20 months, Mr. Obama will add as much debt as Mr. Bush ran up in eight years. …Mr. Bush’s deficits ran an average of 3.2% of GDP, slightly above the post World War II average of 2.7%. Mr. Obama’s plan calls for deficits that will average 4.2% over the next decade. Team Obama has been on history’s biggest spending spree, which has included a $787 billion stimulus, a $30 billion expansion of a child health-care program, and a $410 billion federal spending bill that increased nondefense discretionary spending 10% for the last half of fiscal year 2009. Mr. Obama also hiked nondefense discretionary spending another 12% for fiscal year 2010.
Correction: In an earlier post on one of Rove’s columns, I incorrectly claimed that Bush never vetoed a bill because it spent too much.That was wrong. He did veto a handful of bills once Democrats took control of Congress.
Tuesday Links
- Gene Healy on today’s election in Massachusetts: “If Republican Scott Brown wins the Massachusetts special election Tuesday, the Bay State will have its first GOP senator since the era when disco was king. And Brown will have the much-derided Tea Party legions to thank.”
- Why opportunistic politicians need to stop using times of crisis for their own ends and let the next one go to waste.
- George W. Obama? “Bush’s successor—who actually taught constitutional law at the University of Chicago—is continuing much of the Bush-Cheney parallel government and, in some cases, is going much further in disregarding our laws and the international treaties we’ve signed.”
- Can Google beat China? Cato’s Timothy B. Lee tackles the question in The New York Times Online.
- Podcast: “Our America Initiative” featuring former New Mexico Governor Gary Johnson. Johnson discusses out of control government spending, immigration, the Bush years, the drug war, defense policy and more.
Dear Poor People: Please Remain Poor. Sincerely, ObamaCare
In a new study titled, “Obama’s Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums,” I show that the House and Senate health care bills would impose implicit tax rates on low-wage workers that exceed 100 percent. Here’s the executive summary:
House and Senate Democrats have produced health care legislation whose mandates, subsidies, tax penalties, and health insurance regulations would penalize work and reward Americans who refuse to purchase health insurance. As a result, the legislation could trap many Americans in low-wage jobs and cause even higher health-insurance premiums, government spending, and taxes than are envisioned in the legislation.
Those mandates and subsidies would impose effective marginal tax rates on low-wage workers that would average between 53 and 74 percent— and even reach as high as 82 percent—over broad ranges of earned income. By comparison, the wealthiest Americans would face tax rates no higher than 47.9 percent.
Over smaller ranges of earned income, the legislation would impose effective marginal tax rates that exceed 100 percent. Families of four would see effective marginal tax rates as high as 174 percent under the Senate bill and 159 percent under the House bill. Under the Senate bill, adults starting at $14,560 who earn an additional $560 would see their total income fall by $200 due to higher taxes and reduced subsidies. Under the House bill, families of four starting at $43,670 who earn an additional $1,100 would see their total income fall by $870.
In addition, middle-income workers could save as much as $8,000 per year by dropping coverage and purchasing health insurance only when sick. Indeed, the legislation effectively removes any penalty on such behavior by forcing insurers to sell health insurance to the uninsured at standard premiums when they fall ill. The legislation would thus encourage “adverse selection”—an unstable situation that would drive insurance premiums, government spending, and taxes even higher.
See also my Kaiser Health News oped, “Individual Mandate Would Impose High Implicit Taxes on Low-Wage Workers.”
And be sure to pre-register for our January 28 policy forum, “ObamaCare’s High Implicit Tax Rates for Low-Wage Workers,” where the Urban Institute’s Gene Steuerle and I will discuss these obnoxious implicit tax rates.
(Cross-posted at Politico‘s Health Care Arena.)
Another Reason Imports Get a Bad Rap
Why blame only media and politicians for the public’s confusion about imports and trade deficits? Surely economists deserve some scorn. Some of the misunderstanding can be traced to the famous National Income Identity, which expresses gross domestic product, as: Y = C + G + I + (X-M). That is, national output (Y) equals personal consumption (C) plus government spending (G) plus investment (I) plus exports (X) minus imports (M).
The expression clearly lends itself to the wrong interpretation. The minus sign preceding imports suggests a negative relationship with output. It is the reason for the oft-repeated fallacy that imports are a drag on growth. Here’s why that conclusion is wrong.
The expression is an accounting identity, which “accounts” for all of the possible channels for disposing of our national output. That output is either consumed in the private sector, consumed by government, invested by business, or exported. The identity requires subtraction of aggregate imports because consumption, government spending, business investment, and exports all contain, in various amounts, import value. Americans consume domestic and imported products and services, the aggregate of which shows up in Consumption. Likewise, Government purchases include domestic and imported products and services; businesses Invest in domestic and imported machines and inventory; and, eXports often contain some imported intermediate components. Thus, the identity would overstate national output if it didn’t make that adjustment for iMports. After all, imports are not made on U.S. soil with U.S. factors of production, so they shouldn’t be included in an expression of our national output.
Whip (Health Care) Inflation Now?
During the runaway inflations of 1974 and 1979, Presidents Ford and Carter suggested that inflation was caused by the profligacy of American households. President Ford’s infamous “Whip Inflation Now” speech, for example, said, “Here is what we must do, what each and every one of you can do: To help increase food and lower prices, grow more and waste less; to help save scarce fuel in the energy crisis, drive less, heat less.”
Much of the recent discussion of health care costs likewise treats this as a problem caused by a demonic private insurance industry, and therefore requiring such “reforms” as expanding Medicaid to the non-poor and Medicare to the non-old.
The facts are quite different, as shown in “The Evolution of Medical Spending Risk” by Jonathan Gruber of MIT and Helen Levy of the University of Michigan, in the latest Journal of Economic Perspectives.
Gruber and Levy calculate that real private health care spending per person (in 2007 dollars) “increased from about $700 to $3,500 between 1960 and 2007, a five-fold increase.” They note that “private out-of-pocket spending has not quite doubled.” Yet “government health spending over the same period . . . increased from about $250 to $3,5000, a 13-fold increase.”
In fairness, the quality of health care has been hugely improved since 1960. And prices of physician services (which are often incorrectly compared with the overall consumer price index) have risen no faster than prices of non-medical services.
In any case, President Obama’s claim that the pace of total public and private spending on health care could somehow be “contained” by greatly increasing government spending clearly flunks 3rd grade arithmetic.
Unless the hidden agenda is to impose draconian wage and price controls and political rationing on health care providers, all the rhetorical pretense about proposed health care legislation being a way to hold down overall spending on health care is like saying the solution to chronic drunkeness is more booze.
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