Misdiagnosed: Is the Solution Killing Us?

C-Span this morning featured economist Heidi Shierholz.  One of the questions she got from the moderator was about the chicken and egg nature of our economy.  You need growth to create jobs and spending, but you need spending and jobs to create growth.  What can break this downward cycle?

Her answer was that we need Government spending.  Government spending (as the Keynesian argument goes), will spur growth, which will cause people to need to hire more, which will then flow more money through the economy and produce growth.  Actually, this is what President Bush did when he cut taxes and put more money into the economy and it worked incredibly well.  The difference was that his deficit came from giving the American people their money back in a long term way in order to invest and spend on what they wanted and needed.

But let’s be honest, haven’t we tried government spending already with this recession?  Bush’s deepest budget deficit was $420 billion, and it helped drive Democrats to power on the claim that they would be more fiscally responsible.  Obama’s deficit this year is $1.58 trillion.  This is not a result of lower tax revenues or the Bush economic slump.  This is directly a result of Obama’s $1 trillion in stimulus and other spending increases while only saving a couple million dollars through massive spending cuts (such as printing documents on both sides of the paper).  Obviously the government has been spending more.  The size of government has increased by more than 25%.  As our economy continues to slump and hundreds of thousands continue to join the unemployment rolls, we are starting to realize this might not be the solution this time.

We are going to experience a rebound.  In fact, we have seen several jobless attempts already.  Let’s face it, we are at the point where if a homeless man opens a lemonade stand it counts as positive GDP growth.  The stock market has had some really good days.  But stock increases are followed the next day by decreases.  The only people making money are those who have the buying and selling pattern down.  There is no confidence.

Heidi said something interesting.  She said that in this recession, the number of people saving money has actually increased from 0% to 6%.  That actually makes alot of sense.  Within a very short amount of time last year, people sold hundreds of billions of dollars in stocks and retirement investments in their 401k plans.  You may be in the same situation where you are holding off for now and putting money in your savings account instead of your retirement account.

Why are we holding back, and thus keeping this economy down?  I would argue that it is because of government intervention.  We see a government $11 trillion in debt and quickly getting worse.  Yet in the midst of this, our President is proposing another trillion dollars in spending for unconstitutional government health insurance.  Meanwhile, our economy is propped up with government loans that have to be repaid.  As soon as this recession ends, the TARP repayment recession will begin where Citigroup and GM will lose half of their capital structure through repayment to the government.  GM is already looking to sell as many divisions overseas as they can in order to pay back Uncle Sam.  As with Chrysler, Obama has effectively bought a US company with our tax dollars and is now selling it to foreigners.

With great government programs comes great tax increases.  In many cases, tax planners are advising their clients to claim as much income as possible this year in order to reduce income next year when the Bush tax cuts expire and Obama adds a 4% surcharge on the richest taxpayers to pay for all this debt spending.  Expect the suckers rally and recovery to crash again as soon as the recovery hits full swing.

In addition to the debt spending now and on the horizon, we also have incredible expansions of government and regulation now and on the horizon.  Cap and trade will increase energy costs as an effective tax increase on every American, both rich and poor.  The good news is that Cap and Trade will only “increase costs for each family by the cost of a postage stamp per day”, as Democrats keep telling us.  The bad news is that the cost of a postage stamp is apparently going up to $6.

We had a real good opportunity to fix this economy.  It was the rallying cry of the Right in 2008.  We could have drilled here and produced a growth energy economy that could support expansion into green energy.  Now China is starting to make oil reserves collateral for their loans, and that could quickly be coming here.  To secure the debt we must take on in the future to meet our government obligations, we may have to put up our own untapped oil reserves as collateral.  At the same time, we are lending billions of borrowed dollars to Brazil so they can drill there, sending billions to OPEC in the Middle East so they can drill there, and regulating American industry so we can’t drill here.  Apparently Saudi Arabia and Brazil are more environmentally conscious than we are.

Think about that for a second.  We are borrowing billions from China to lend to Brazil so that Brazil can explore their oil reserves which are currently being put up as collateral for China so that Brazil can also borrow from China.  And China gets this money to loan through illegal monetary policy that they control through Communist oppression of their people.  Sounds to me like China is holding all the cards and we are going all in.

If we were going to run a $1.58 trillion dollar deficit, we could have done it by giving that money back to the American people and letting the American people buy and invest in things we wanted.  Instead, our government violated the constitution by taking our tax dollars across state lines and investing in fish and honey bee insurance, duck ponds, turtle bridges, ACORN, skate parks, and other useless or temporary stimulus projects.  Many of these were gifts to Democrat congressional districts.

The government, from Bush in his last two years to Obama, saw the problem as Americans not spending enough.  So they decided to take our money, borrow from China, and spend it for us.  This economy will not experience permanent growth again until we know that the country we love will still belong to us 10 years down the road.  It will not begin to grow until we know that we can invest in a company today and not have it be regulated to death tomorrow if it dares make a profit. Government expansion through foreign debt represents a poisonous leverage that does not produce private sector growth.  We would be better off borrowing money from Uncle Vinny at the race track.

Update: The National Association of Business Economics agrees in a recent poll

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