Wednesday, April 6, 2011

What Really Happens When You Cut Government Spending: A Real Life Example (The George Costanza Principle)

Today's post is a rerun of a post that was done back on July 14, 2010 but it is especially relevant today. While this post originally focused on the fallacy of stimulus spending, the example used below also applies to outlandish government spending. Our national debt has risen hundreds and hundreds of billions of dollars since last July and many concerned Americans realize that the country is heading for a financial meltdown if government spending is not gotten under control soon.

However, many in the Washington political class, especially Democrats, do not seem to have the same urgency or understanding of what is happening. Democrat after Democrat is opposing even the smallest decrease in government spending with such weak and lame excuses that it will result in another recession, it will increase unemployment, the economic recovery is still too weak, etc.

Anyone who suggests there is waste and fraud in government spending is vilified as heartless and ignorant. Most Democrats, and some Republicans, would put off drastic spending cuts until some unspecified point in the future in order to not have to take any kind of courageous stand for the good of the country. Only the good of their political careers and their next election is important to them. They would rather waste money and keep this dysfunctional government apparatus in a business as usual state then to show some leadership and fix what is obviously broken.

This is where the July 14, 2010 post comes into play. It is a real life example of what happens when government spending is drastically reduced to just essential services, Americans are allowed to keep more of their earnings and the government does not ring up record deficits every day, every week, and every year. The scenario below actually happened. it is not theoretical or some economist's thesis. It was reality in the 1940s, reducing government spending substantially increased the national wealth and reduced/avoided would should have been record shattering unemployment levels.

Let me say it again, this economic scenario actually happened. You can look it up. After you read the post, please explain it to your friends who happen to be Democrats and ask them to rebut this reality. They cannot since it was the reality that made this country great until the political class started to spend it into bankruptcy. Explaining this reality to them would make George Costanza so proud (read more to understand).

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Wednesday, July 14, 2010



Political Class Voodoo Economic Myths And Lies - Myth #3


The past two days we have disproven two long standing myths and lies that the political class has constantly shoved down our throats, namely that the so-called Bush tax cuts for the rich caused all of the economic trauma and skyrocketing deficits over the past few years and that Social Security is a far better and safer alternative compared to letting people invest their money for retirement the way they want to invest it. Two myths down, a few more to go.


Today we will disprove the myth that government spending is an effective way to stimulate the economy and create real jobs. This is a timely topic as the nation continues to struggle with very high unemployment (about 10%) and sluggish economic growth. The Obama administration launched their stimulus economic program last year and some in the political class are calling for another shot of stimulus spending since we are still in the economic doldrums.

But did the first stimulus package to any good? You can obviously make the case that it did not since unemployment is still so high, with over 14 million Americans still out of work. A vast majority of the 5% or so economic growth in the fourth quarter of 2009 can be proven to be from the temporary jolt of stimulus spending, spending that has resulted in no long lasting effect as economic growth has fallen off throughout 2010.

If we go back to our blog post of October 31, 2009, we see more distressing numbers. At that time, the Obama administration claimed that the stimulus plan had created or saved 650,000 jobs. It also reported that $180 billion of the stimulus funding had been spent. If you do the simple calculation, using all of Obama's numbers, you see that each of the jobs created/saved cost about $277,000 each to be created or saved. You cannot reduce unemployment through stimulus spending if it costs over a quarter million dollars to create or save one job that likely pays significantly less than that.


The sad truth that most in the political class do not understand or do not want to understand is that stimulus spending is an ineffective and inefficient way to spur the economy. It does not create jobs, it creates short term work, work that usually vanishes once the stimulus spending is spent, as illustrated by the decline in economic growth over the past year or so once the stimulus was spent. Governments cannot create wealth, they only can take wealth (via taxation) and redistribute it, usually less effectively than the free market. If that wealth had not been taken as taxes, it would have still entered the economy but would have entered the economy via individual citizens making individual choices. All the stimulus spending did was move around the money that was spent, it was not incremental spending to the economy.


A perfect counter example to this myth is what happened at the end of World War II. Consider the following information, mostly gathered from official U.S. government sources The first number/column is the calendar year, the second number is Federal budget in millions of dollars in that year, the third number is the unemployment rate and the fourth number is the GDP in billions of dollars:


1940: $9468, 14.6%, $101.4


1941:$13653, 9.9%, $126.7


1942: $35137, 4.7%, $161.9


1943: $78555, 1.9%, $198.6


1944: $91304, 1.2%, $219.8


1945: $92712, 1.9%, $223.0


1946: $55232, 3.9%, $222.2


1947: $34496, 3.9%, $244.1


1948: $29764, 3.8%, $269.1


1949: $38835, 5.9%, $267.2


1950: $42562, 5.3%, $293.7


1951: $45514, 3.3%, $339.3


Combine these facts with the facts that in 1945 there were conservatively about 10 million members of the armed services coming home to start civilian life and jobs (about 7% of the overall U.S. population). Did the U.S. government implement a stimulus spending program, significantly growing the deficit in order to create jobs for these returning members of the armed forces? It does not appear so from the above numbers:


- From a wartime high of about $93 billion in 1945, the Federal budget was reduced by about 40% in just one year in 1946 (from $93 billion to $55 billion)


- By 1948, just three years after the war ended, the Federal budget and spending was under $30 billion or almost 68% smaller than it was in 1945.


- However, despite these drastic cuts in Federal spending and about 7% of the population coming home to look for a job, the average unemployment rate for the six years immediately after the war was about 4.4%, a level that the Obama administration would kill for today.


- 7% of today's U.S. population equates to the creation of enough jobs for over 20 million Americans, enough to keep today's unemployment rate well under 5%.


- During the same time period, overall economic growth increased year over year for all but one year of the six years after the war and the U.S. government ran a budget surplus in four of the six years after the war (not on the chart).


Let's review what happened after World War II: despite a massive influx of new people into the economy and the draconian reduction in Federal government spending immediately after the war ended, unemployment levels stayed low, the economy grew robustly, and the Federal government enjoyed budget surpluses for several years (four out of six) immediately after the war. No stimulus programs, no Cash For Clunker disasters, no skyrocketing national debt, minimal deficit spending. All of the things that the political class is doing today that are not working, the government in the 1940s did the opposite of and it worked beautifully.


Kind of reminds of the old Seinfeld episode where George Costanza does the exact opposite of what he has been doing because that behavior has always resulted in failure. Maybe the political class should learn a lesson from George and our analysis above: lose the myth that government stimulus spending actually works. When you start to look like George Costanza, you have a big problem, political class.


Let Americans keep most of their hard earned wealth, as outlined in Step 1 of "Love My Country, Loathe My Government," to spend it freely and personally how they want to spend it. They showed in the 1940s that their spending it on what they want and need is the surest way and mos efficient way to grow the economy. America came out of the war a healthy, robust nation with the strongest and freest economy in the world, something that we may not be able to claim today.
 
 
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One final note: the origin for the above analysis was not my own idea, it was put together after reading an excellent article from the CATO Institute where they explained what happened, economically, after the war. However, in order to prove it to myself, I did the actual data collection to verify their story. They are the ones responsible for this worthy historical insight, not me.


Our book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at http://www.loathemygovernment.com/. It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.


Please visit the following sites for freedom:

http://www.cato.org/
http://www.robertringer.com/
http://realpolichick.blogspot.com/
http://www.flipcongress2010.com/
http://www.reason.com/
http://www.repealamendmen.com/

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