Here are two good videos dealing with stimulus spending and Keynesian economics. The first video comes from January 2009 about Pres. Obama’s stimulus plan. Daniel Mitchell clearly specifies how the stimulus will not work, and now drawing close to two years later, we see that the stimulus spending did not help the nation, as proved by our flagging economy and stagnant unemployment rates.

The second video was produced by Daniel Mitchell again a month earlier than the previous video, but this time he is talking specifically about why Keynesian economic theories don’t work.

Albert Einstein is attributed with the following quote that clearly describes this administration and anyone who advocates government spending to “prime the pump” of the economy: “Insanity is doing the same thing over and over again and expecting different results.” Keynesian economics has never worked, but that doesn’t stop governments from trying it again and again. “This time,” the government tells us, “it’s going to work.” Certainly sounds like insanity to me.

I’ve written before about our government’s problem with the economy, as witnessed by their mistaken belief that the government can spend the nation back into productivity. Part of this belief is that there exists some magical multiplier of government spending. The theory goes something like this: when the government spends a dollar on some project, the effect on the economy is greater than the original dollar. It magically multiplied!

As theories go, it’s fine. The problem happens when the ivory-towered Gedankenexperiment is tried in the real world. I’ll simplify this to make it clear: three people, Peter, Paul, and George are the citizens of Madeupistan. To stimulate the economy, George takes $10 from Peter and gives it to Paul. Wealth has not been created, it’s only been transferred since Peter is now $10 poorer and Paul is $10 richer. The net effect on the economy is $0. And this is the best case scenario.

What really happens is far worse. George takes $10 from Peter and gives $4 to Paul. George pockets the other $6 as his handling fee. And as long as George takes money from Peter to give to Paul, both George and Paul are happy with the outcome. Any election or referendum on finances in Madeupistan pass with 66% of the vote as George and Paul are solidly behind the stimulus spending. Peter keeps voting against having his money taken away from him to fund George and Paul, but he’s in the minority, and so he loses. George starts keeping $7 from the money taken from Peter since he has to pay for the increased advertisements needed to demonize the evil greedy rich Peter. Paul doesn’t like getting only $3 when he was getting $4 before and was used to it, so he petitions George to increase the rate of fiscal confiscation from Peter. Eventually Peter gets fed up with having his money seized, so he moves to Freedonia, taking his business and money with him. George then starts eyeing Paul as the new source of stimulus funds.

Policy wonks and university intellectuals love the ideas of John Maynard Keynes, but Keynesian economics just don’t work in the real word. When the government “stimulates” the economy with spending, it does so with money first taken from the people, or with freshly-printed money that is taken from future generations. And in either case, the government keeps some of the money to pay for the process of transferring the money. And the net result isn’t a magical multiplier increasing the wealth and economy of the nation; it’s a unmagical divider doing the opposite. But government will continue to push for Keynesian economics because they get their cut of the money, and they get to say who receives the money and reap the political benefits of their largesse.

If the government wanted to truly stimulate the economy, it would get out of the way by reducing taxes on corporations and people. And this isn’t some wild speculation or untried theory in Madeupistan. It has worked every time it has been tried in the real world.

Here is the fourth of my posts inspired by an editorial cartoon this week. Today’s was drawn by Lisa Benson.

Bush's tax cuts expiring

The tax cuts that President Bush pushed for are slated to expire January 1st, 2011. And for many Americans, it means a tax hike. You can calculate and see if that’s the case using this handy form from the Tax Foundation. I did a quick test and found out that I’ll be coughing up almost $2,500 more if the tax cuts go away. I don’t know about you, but $2,500 is a bunch of money!

But there is something else worth considering. Bush’s tax cuts have and will affect the overall economy. The tax cut law was signed by President Bush on May 28, 2003, and the effect was quickly seen. The GDP growth for the second quarter of 2003 was 1.10%, but in the third quarter, with the tax cuts in effect, the GDP growth was 2.25%. GDP growth more than doubled, thanks to cutting the top rates people had to pay. Also interesting is the growth of private investment before and after the tax cuts. The private investment rate two quarters before the tax cuts kicked in were 0.61% and 0.42% while the two quarters afterwards were 3.96% and 4.50%. When people realized they could keep more of their hard-earned money, they were willing to invest it in the economy. Since the tax cuts had been heavily debated for a while before their passage, it’s very possible that many businesses and investors held off purchases and big spending until after the tax cuts kicked in.

Let’s take a look at where we are now. We are almost a mirror opposite of 2003. Instead of anticipating tax cuts and postponing activities, businesses are anticipating tax increases and hurrying to do what they can to earn before the taxes go up. As I see it, the rush by businesses and investors to get while the getting is good is boosting this weak economy. Once President Bush’s tax cuts expire, there won’t be nearly as much effort to work for less. I see a deeper recession if the tax cuts expire, and I’m not the only one seeing it.

“In a worst-case scenario, allowing the Bush tax cuts to expire and failing to fix the AMT could result in (1.5 percent) of fiscal drag in 2011 on top of the 1 percent fiscal drag we expect to occur as the Obama fiscal stimulus package unwinds,” Deutsche said in a note to clients. “If the recovery remains soft/tentative through early next year, this additional drag could be enough to push the economy to a stalling point.”

The opinion runs counter to that of Treasury Secretary Timothy Geithner, who said earlier this week that allowing the cuts to expire would not cause the economy to re-enter recession. The administration has proposed letting most of the tax cuts stand, but eliminating the ones for the top-tier earners.

Deutsche compared the situation to Japan in the 1990s, when the government let tax cuts expire and cut stimulus, leading to another leg down in the recession and ensuring the nation’s “lost decade” of no economic growth.

Our Treasury Secretary Timothy Geithner says that letting the tax cuts expire wouldn’t cause the economy to re-enter a recession. And government said that the multi-billion dollar stimulus would hold unemployment at 8%, but we are sitting at 9.5%. The administration doesn’t have a good record when it comes to foreseeing the results of their actions. Heck, our Treasury Secretary has a hard enough time just paying his own taxes.

How could we get out of our current recession? I have a plan that would do so in just three easy steps. But Congress would never do it because it means reducing their power. And they can’t have that.

OK, to get me back into the swing of posting stuff here rather than driving my wife nuts with my verbal ranting, [Yes please! --TPK] I’m going to use some political cartoons as a jump-off spot. I’m calling these posts Cartoon Wisdom.

First up, something by Lisa Benson.

Laser-like Focus

President Obama talks about having “saved or created” millions of jobs because of the multi-billion dollar stimulus. Back when the stimulus was being debated, the government put out some numbers of the jobs they expected to create. Now many months later, Republicans have checked out the reality of jobs in each market compared to what the Democrat stimulus promised would appear. Here is the table they published showing the prediction verses reality.

Industry

Administration Prediction of Job Creation by the End of 2010

Actual Change in Jobs since Stimulus (February 2009 – June 2010)

Construction

678,000

-853,000

Manufacturing

408,000

-707,000

Financial Activities

214,000

-310,000

Retail Trade

604,000

-286,800

Professional and Business Services

345,000

-211,000

Information

50,000

-158,000

Transportation and Warehousing

98,000

-155,600

Wholesale Trade

158,000

-135,400

Other Services

99,000

-72,000

Leisure and Hospitality

499,000

-69,000

Mining

26,000

-16,900

Utilities

11,000

-7,500

Government

244,000

+201,000

Education, Health and Social Services

240,000

+434,000

Total

3,675,000

-2,347,200

Over two million jobs lost in this economy, and yet President Obama is all to happy to claim that millions of jobs have been created or saved. Yeah. Right.

In every sector of the economy, jobs have been lost. But one sector has seen lots of growth, and that has been President Obama’s laser-like focus: government jobs. Interestingly enough, the list breaks it down into Government and “Education, Health and Social Services.” But here’s the dirty little secret: both sectors are government jobs.

But this isn’t a surprise to me since I have written about it already:

If you are uncertain how the current administration will react to some situation, just identify the action most likely to increase the government’s size and power, and you will know exactly how the government will act.

Let’s suppose that you are an ocean diver with an air hose connecting your diving helmet to the air supply on the boat. And let’s also suppose that the manager on the boat is anxious for the job to finish faster. He’s not diving to help get the job done, but he is certainly willing to tell you how to do the work. And to motivate you, he steps on the air hose while telling you to work faster. Sounds pretty dumb, doesn’t it? How does choking off his life-giving air make the diver work better? The diver needs all the air he can get since cutting down on the air flow starves the diver of the vital oxygen he needs to work at his best.

Likewise, the government is guilty of stepping on the economic air hose every time it raises taxes, especially when companies are the ones being taxed. Corporate taxes depress economic activities just as standing on a diver’s air hose depresses that diver’s ability to work. Taxes are an economic punishment, and people will respond to punishments by doing less of that which is punished. It’s just basic human nature. So a government tax on business activities will result in fewer business activities, and in a time of a recession, do we really want to depress the economy further?

“But the government needs to tax businesses! The government uses that tax money to ‘prime the pump’ of the economy during a recession.” That’s the economic theory of John Maynard Keynes, but Keynesian economics just don’t work. You can see this by taking it to the extreme. If government were to tax businesses at 100% and redirect the results to ‘prime the pump’ of the economy, what would be the result? Sure, the government would pull in taxes the first year, but once businesses realized that the government was serious in taking all their profits, business owners would close their factory and office doors. Why would they work hard for no reward? And if businesses were to shut down, how much of an economy would be left? With a dead economy, the government would get nothing from taxing the vanished businesses, and nothing from a non-working public, so just how successful was “priming the pump?”

Let’s reverse it and see what happens: suppose government dropped the business tax rate to 0%. With no one stepping on their air hose, businesses would be unleashed to work as hard as they wanted to make money, and the economy would roar to life. After all, the economy is not the government handing out confiscated money, but it is businesses and people working for themselves. “But how will the government get the tax revenue it needs to run the country?” Well, if the government doesn’t need to “prime the pump” with confiscated money, its needs are smaller. But because a business is comprised of people, the government will still get taxes from the workers. And interestingly enough, when government has reduced tax rates on businesses and people, the total taxes brought into the treasury go up because the economy runs better with the government off its air hose. It happened with the tax rate drop proposed by President Kennedy and passed after his death. It happened with President Reagan’s cuts in 1983. And it happened again with President Bush in 2003.

Can you point to a time when government “priming the pump” has met with equivalent success? President Roosevelt is often held up as an example of triumphant Keynesian economics, but it’s not the example people think it is. The economy was certainly depressed when FDR entered office, but all the economically stifling actions he pushed for only succeeded in depressing the economy for a full decade. Likewise, the actions of the current administration have done little to stimulate the economy. Unemployment is hovering around 10%, and businesses are wary of hiring as the government continues to meddle, and the economy remains lifeless.

What is the solution for our current doldrums? If the government would step off the economic air hose by greatly lowering tax rates on people and businesses and drastically cutting back on government deficit spending, the economy would explode with activity. And when the economy is roaring along, the lowered tax rates will still result in increased revenue to the government’s coffers, money that the government could use to pay down our country’s debt.

How can I state this with such confidence? Simply because it has worked that way every time it’s been done. Let’s try an economic theory that has a proven track record.

Here is 51 second verbal home run scored against our current administration.

I’m sick and tired of hearing about Obama and the White House coming out with yet another crisis that has to be fixed by government sticking it to the people and taking more of what we earn and produce. Instead of allowing our small businesses, especially, to keep more of what we earn and produce, and then reinvest according to our own priorities. So that we can grow and thrive and hire more people. That’s how we create jobs. That’s how the economy will get roaring back to life.

But see, too many in the White House, including our own president, I don’t know when they have run a business. I don’t know when they have been a CEO of anything where they’ve had to look out for the bottom line, and they’ve had to make payroll and live within their own means with a budget. You know, they’re from government. They’re community organizers. They’ve been spending other people’s money for so long that I think a lot of the free enterprise principles that so many of us believe in, it’s all foreign to them.

For someone whom the liberal media tells us is dumber than a box of rocks, former Governor Palin understands better than this administration how the economy works and grows, and it isn’t from the government spending money while lurching from one crisis to another.

No matter how you slice it, we don’t have much by way of good economic news. The unemployment numbers for September 2009 came out, and the news isn’t good.

Job losses moderated in August, but the unemployment rate ticked up 0.1 percentage point to 9.8%, the highest level since June 1983.

But another more comprehensive gauge of unemployment ticked up even more. The government’s broader measure, known as the “U-6? for its data classification, hit 17% in September, 0.2 percentage points higher than August.

The comprehensive measure of labor underutilization accounts for people who have stopped looking for work or who can’t find full-time jobs. The U-6 figure is the highest since the Labor Department started this particular data series in 1994. But, similar to the headline unemployment rate, it likely isn’t as bad as it was in the 1980s. U-6 only goes back to 1994, but a discontinued measure has a longer history. That old U-6 measure peaked at 14.3% in 1982. Through some calculation, a comparable measure can be determined in the current report. Under the old U-6 methodology, the September rate would be 13.5%, the highest rate since 1983, but still below the peak.

Ow. But things could be worse! President Obama has praised the $787 billion economic stimulus plan he signed, claiming pie-in-the-sky numbers before his inauguration:

President-elect Barack Obama said on Saturday an analysis of his stimulus proposals showed that up to 4 million U.S. jobs could be saved or created by 2010, nearly 90 percent of them in the private sector.

Obama said previously his estimated $800 billion plan to lift the country out of a yearlong recession would create or save 3 million jobs, but the new analysis showed that number would range between 3 million and 4 million.

Good thing the stimulus package was passed. If we hadn’t passed it, the White House predicted we’d have unemployment as high as 8.8% instead of the 7.9% unemployment we have now, thanks to the stimulus package.

Wait, what?

Unemployment

That’s right — Obama predicted that without the stimulus package, unemployment would peak out at a nasty 9%, but thanks to his skillful leadership, it would not crest 8%. So, who are you going to believe, Obama, or the lying Bureau of Labor Statistics?

I’ve read that our economy has already turned the corner and the economy is improving, so why aren’t the jobs coming back? And why should they come back? When a business hires someone, the business is looking to the future and confident about what it holds.

But what is there to inspire confidence in business today? Is government going to pass a Cap and Trade bill that will greatly increase the cost of energy and doing business? Is government going to meddle with the banking industry again? Is government going to take over the health care industry? Is there anything government won’t mess with in the next few months, let alone the next few years? If I were an employer, I’d be scared spitless about what the future holds, and I’m not sure if I’d be willing to bet my company on what the government will or won’t do.

Uncertainty about the future, mainly at the hand of an increasingly meddling government, explains why the job market shows no sign of recovery. Here’s a graph that puts the current recession in perspective.

Unemployment trends

The economy would do much better if the government would get out of the way.

I found two news stories today to be interesting. Let’s compare the headline and first paragraph from each. The first one comes from The New York Times:

G.D.P. Grows at Tepid 1.9% Pace Despite Stimulus

The American economy expanded at a weaker-than-expected 1.9 percent annual rate between April and June, the Commerce Department announced Thursday, while numbers for the last three months of 2007 were revised downward to show a contraction the first dip since the recession of 2001.

The second story reporting the same news comes from MSNBC:

Economic growth picked up in second quarter
Tax rebates energized consumers; contraction recorded at end of 07

WASHINGTON – Economic growth picked up in the second quarter as tax rebates energized consumers. The rebound followed a treacherous patch where the economy jolted into reverse at the end of 2007.

Did you notice the difference? The New York Times article is gloom and despair, with a shiv to President Bush’s stimulus package right in the article’s title. And as an added bonus, reports that the fourth quarter of 2007 showed negative growth for the first time since *ominous noise* 2001. The MSNBC article also identifies the negative growth in Q4 2007, but is upbeat about the second quarter report of 2008.

If you continue to read, you’ll find out in the second paragraph of the MSNBC article that the Q2 growth was double the Q1 growth. That’s a good thing, right? The New York Times article doesn’t bring up the Q1 growth of 0.9% until the seventh paragraph. Oh, and The New York Times article says it was published August 1st, 2008 — proof positive that they have a time machine.

But there’s no bias in the news.

None.

Have you heard the news? The U.S. unemployment rate increased 0.5% between April and May 2008, going from 5.0% to 5.5%. The immediate result of this report is a flurry of news stories bemoaning unemployment and reaching for their thesauruses to come up with good scare words: jumped, soared, leaps. Here’s a snippet of an MSNBC story:

The nation’s unemployment rate jumped to 5.5 percent in May — the biggest monthly rise since 1986 — as nervous employers cut 49,000 jobs.

The latest snapshot of business conditions showed a deeply troubled economy, with dwindling job opportunities in a time of continuing hardship in the housing, credit and financial sectors.

“Jumped” appeared in the title and first paragraph. “Soared” appears in the fourth paragraph, and “leaps” appears in the RSS feed title for this story. All of this reminds me of something Red Planet Cartoons published in April:

It's a matter of perspective

Stocks have taken a dive because of this hand-wringing report, but what does this news story identify as the cause of the “continuing hardship”? “Housing, credit, and financial troubles” all turn out to be the same thing.

Earlier in the decade, the government essentially forced lending companies to offer loans to people who were poor credit risks, or they’d be branded and punished as horrible racists and discriminating goons. Now — surprise, surprise — a number of people who were poor credit risks due to their unstable financial behavior are defaulting on these risky loans. Government stuck its foot in front of the housing, credit, and financial sector, and now government is reporting that this sector has taken a tumble. Well, duh! What do ya expect?

Certain politicians are always talking about government as though it could singlehandedly fix the economy. In truth, there are a few ways our government could have an immediate effect on our economy: namely, if it released the restrictions on ANWR oil drilling, oil refinery building, off-shore oil drilling, and nuclear power plant construction. Those four endeavors would open up thousands of jobs in construction and maintenance alone, not to mention the number of jobs created to support them. As an added bonus, we would be increasing our domestic energy supply at a time when there is an ever-increasing demand. Increasing the supply would mean a decrease in the cost of energy, and that would benefit our economy, and the world’s economy as well. And the increase in supply would most likely lead to decreased prices at the gas pump.

Or you could try electing liberals to government whose only promise is for “change” — what kind, exactly? — and whose actions show they prefer to restrict our energy supply so you have to pay more at the pump. So how, exactly, are liberals for the little guy?

UPDATE (6/9/2008 10:25:27 PM): Jerry Bowyer at TownHall.com posted a reason for the spike in unemployment in May — the minimum wage increase Congress passed last year:

Congress is to blame. Last year Congressional Democrats (along with some Stockholm-Syndromed Republicans) passed the Fair Minimum Wage Act of 2007, which started a phased hike of the minimum wage from $5.15 an hour to $7.25. Free market economists warned them that this would increase unemployment – that rapid increases in unemployment compensation hit teens and minorities the hardest. But the class-warriors are running the people’s house now, and they would hear none of that, so they took to the floor, let loose the dogs of demagoguery, and saddled America’s pizza parlors, municipal swimming pools, house painting businesses and lawn mowing services with a huge cost increase.

Now, we see the perfectly logical outcome of wage controls – rising unemployment among the most economically vulnerable. The chart above tells the story: Friday’s unemployment spike occurred overwhelmingly among teenagers, and secondarily among African Americans. Just like we said it would. A kid who is at entry level of job skills may be a good deal at 5 bucks an hour, but not at 7. Our anointed leaders gets to glory in their generosity (with other people’s money) and just so long as very few people in the media know that a demand curve slopes downward (a good bet, there), no one calls them on it.

Which makes yet another way the government has caused this problem.

The title of the MSNBC article by Senior Producer John W. Schoen is “Can government turn the economy around?” The answer is a loud yes. Government, by its action and inaction, can turn a healthy economy sick just as it can turn a sick economy healthy. But it really depends on what the government plans are. In a nutshell, if the government butts out of the economy and allows people to engage in commerce without restrictive and repressive rules and regulations, the economy can soar. When the government plays the role of buttinski, their actions can cause the economy to sour. Here is the second paragraph from the article:

Theres no shortage of ideas in an election year. But it remains to be seen just how much the government can do to halt the continued slide in an economy battered by falling housing prices, rising energy costs and a lending slowdown caused by worries about how many more loans will go bad.

Let’s take a quick look at the three woes in Schoen’s article. Housing prices are falling because they have risen in a speculative market driven by house flippers and low interest rates. Rising energy costs can be blamed on an increase in demand for oil as nations like India and China want to get out of the 20th Century and join the 21st. But some of the blame for the increase can be laid at the feet of government and government regulation. We haven’t built a new nuclear power plant in the U.S. for over 30 years, and environmental nutjobs have succeeded in preventing the U.S. from tapping into much of our own available oil fields. And the loan crisis was caused by the government forcing companies to give loans to high-risk people, or they would be labeled as discriminating racists and prosecuted by government thugs. Now that — surprise, surprise — these high-risk people are defaulting on their loans, government thugs like Senator Clinton are bashing those same loan companies as being “predatory.” Politicians get to look good twice: first when they cause a problem, and later when they try to “fix” the same problem they created.

European and Asian markets are struggling today because of their worry over a U.S. recession. So, what can the government do that could stimulate the economy? Quite simply, the government could just get out of the way. The more government butts into our jobs and tells us what we can and can’t do, the harder it is for us to do our jobs. And possibly the easiest way for the government to leave us alone is by lowering the tax rates. As I have written before, you get more of that which you reward, and less of that which you punish, and taxes certainly are punitive on people working and doing business.

But it appears we may instead get a tax rebate. According to this news report, Pres. Bush is considering up to an $800 tax rebate, similar to the $300 tax rebate that was given in 2001. But whether it is a tax rebate or a tax rate cut, it will have to pass the Democrats in Congress. And knowing that, I have to wonder whether Democrats are really willing to help.

Here’s their dilemma — if Democrats do nothing or block any attempt by the White House to improve the economy, they could use a weak economy to push themselves forward. But doing so politically would mean hurting the little people the Democrats say they support. Time will tell whether the Democrats in Congress will put their own political fortunes ahead of the national interest.