Obama Is Only Digging The Hole Deeper
Originally Posted At IBD Editorials
By William G. Shipman
August 03, 2009
The first option has some similarities to President Bush's generosity with other peoples' money. The second is a new tactic, one that replaces private enterprise and individual liberties with diktats from Washington. Neither will succeed.
On Feb. 17, Obama signed into law the $787 billion stimulus bill. Two months later he spoke at Georgetown University explaining his logic for the bill.
"To begin with . . . the last thing a government should do in the middle of a recession is to cut back on spending. . . . If every family in America cuts back, then no one is spending any money, which means there are more layoffs, and the economy gets even worse. That's why the government has to step in and temporarily boost spending in order to stimulate demand. And that's exactly what we're doing right now.
As evidence of early success, he offered:
Because of our recovery plan, schools and police departments have canceled planned layoffs. Clean energy companies and construction companies are rehiring workers to build everything from energy efficient windows to new roads and highways.
His theory that the government can increase demand by boosting spending is straightforward. Spending increases the demand for labor at targeted companies, such as those that purport to save energy.
These newly hired workers further increase demand by spending their wages on goods and services, providers of which hire more workers.
And so the process continues. One dollar of government spending multiplies as it travels down this path. His theory is correct, but not complete.
Government spending must come — by taxing or borrowing — from somebody else who now spends less by the amount that the government spends more. His lesser spending also has a multiplier, but it is negative. The result of spending more and spending less is net zero.
Government spending can have a net-positive effect if it's more productive than the private spending it replaces. Can, but unlikely.
Government does not have the same incentives and constraints as the private sector. A private enterprise must offer a product that results in revenue exceeding expenses, or it will cease to exist.
The government doesn't have that incentive because additional taxes can be levied irrespective of expenses. Unlike a private firm, government can provide an inferior product and exist forever — even grow — irrespective of how poorly it's managed.
In support of this point, consider Sen. Chuck Grassley's desire to create a rain forest in Iowa financed, in part, by the federal government. As bizarre and wasteful as a rain forest in Iowa may seem, it was not from the senator's point of view, given his political costs and benefits.
The benefits of the rain forest are concentrated within Iowa; the federal costs are dispersed across the country. Iowans, therefore, pay a small fraction of the federal financing and receive all of the jungle benefits.
Although rational for a single politician to promote almost anything financed this way, it leads to out-of-control spending at the national level and a growing government.
The government also must raise taxes to finance such increased spending. To the extent that higher taxes reduce the after-tax return to produce, production and employment will be less, and the economy will grow more slowly.
Less-efficient spending and being generous with other people's money will not achieve Obama's goals. He is digging the economic hole deeper.
The president has also forced the government into the private sector as the General Motors case illustrates. GM's fate didn't happen overnight; it was terribly mismanaged for decades as its longtime declining market share and capitalization attest. But others were prospering. The auto industry wasn't sick; GM was.
Instead of GM's fate being determined by the free decisions of car buyers, the Obama administration created its own rain forest, the GM bailout. Some $50 billion later, it's largely owned and controlled by the U.S. government.
Politicians can now choose which dealerships to close or keep, what cars to build, where to build them and who will build them. If the new company doesn't sell enough cars to cover expenses, politicians can raise taxes.
The new General Motors is the government's model of incentives and constraints. It will be just as inefficient as its owner.
As taxpayers, we are forced to finance rain forests and auto companies. If we were free to choose, we probably would not finance them. Each new dollar we pay in taxes is one less dollar of freedom. The oppression of government is present: GM, Bank of America, Chrysler, AIG, medical providers, the wealthy. Who will be next?
Shipman is chairman of CarriageOaks Partners LLC in Manchester-by-the-Sea, Mass., and a member of the board of directors of Investors Real Estate Trust in Washington, D.C.
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Exit Not An Option In Chuck Schumer's America. New York Senator Chuck Schumer has introduced the Fugitive Taxpayer Act of 2012 to re-impose taxes on expatriates after they flee the United States and take up residence in a foreign country. Proposal also would impose a mandatory 30 percent tax on the capital gains of anybody who renounces their U.S. citizenship and would bar such individuals from ever reentering the United States again.
