If it only were that simple. What’s wrong with it? Oh, just the usual. Negative side effects and unintended consequences of government action.

When the government stimulates the economy, it spends money, and that money has to be taken from somewhere. It’s all too easy to ignore the negative effects on whomever of whatever the money was taken away from and just focus on the wonderful things that happened to those who were given the money. That’s the fallacy of the stimulus!

This post presents some definitive evidence of the failure of government spending as a tool for stimulating the economy, and it is intended as a direct rebuttal to anyone claiming that Obama is such a great president because he “saved or created” X number of jobs, or that the economy would have been so much worse had Obama not done __________.

Let’s begin…

A 2010 Harvard Business School study set out to investigate how businesses benefit as their state’s congressional delegation grows in stature and is therefore able to bring in more Federal spending to the state.

Using data compiled from a 40 year period, the researchers discovered, to their great surprise, that as more Federal money flows into a state, its “companies experienced lower sales and retrenched by cutting payroll, R&D, and other expenses.”

And here’s why:

Some of the dollars directly supplant private-sector activity—they literally undertake projects the private sector was planning to do on its own. The Tennessee Valley Authority of 1933 is perhaps the most famous example of this.

Other dollars appear to indirectly crowd out private firms by hiring away employees and the like. For instance, our effects are strongest when unemployment is low and capacity utilization is high. But we suspect that a third and potentially quite strong effect is the uncertainty that is created by government involvement.

All throughout 2009 and 2010, president Obama could not stop bragging about how many jobs he had “saved or created.” But of course, it’s very easy for the government to “save or create” a job. It’s a no-brainer. Just borrow, say $100,000, and pay a man to dig some holes and fill them back up again. And bingo, you’ve created a job. And if you contract a private company to do it, you can even be so bold as to call it a “private sector” job. Easy as pie.

So what’s the problem? The negative side effects and unintended consequences of course. What if, due to government action, for every job “saved or created” there are even more jobs “forestalled or destroyed”?

And this is exactly what happened, says another academic study, which you can read here.

The study concludes that at best the stimulus created no private sector jobs. The only thing it “save or created” were government jobs. The study further concludes that the stimulus has likely destroyed one million private sector jobs to create 450 thousand government jobs.

Here’s the abstract:

This paper uses variation across states to estimate the number of jobs created/saved as a result of the spending component of the American Recovery and Reinvestment Act (ARRA). The key sources of identification are ARRA highway funding and the intensity of state sales tax usage. Our benchmark point estimates suggest the Act created/saved 450 thousand government- sector jobs and destroyed/forestalled one million private sector jobs. The large majority of destroyed/forestalled jobs are in a subset of the private service sector comprised of health, (private) education, professional and business services, which we term HELP services. There is appreciable estimation uncertainty associated with these point estimates. Specifically, a 90% confidence interval for government jobs gained is between approximately zero and 900 thousand and the counterpart for private HELP services jobs lost is 160 to 1378 thousand. In the goods- producing sector and the services not in our HELP subset, our point estimate jobs effects are, respectively, negligible and negative, and not statistically different from zero. However, our estimates are precise enough to state that we find no evidence of large positive private-sector job effects. Searching across alternative model specifications, the best-case scenario for an effectual ARRA has the Act creating/saving a (point estimate) net 659 thousand jobs, mainly in government. It appears that state and local government jobs were saved because ARRA funds were largely used to offset state revenue shortfalls and Medicaid increases (Fig. A) rather than directly boost private sector employment (e.g. Fig. B).

If this is not enough, we now have another case study on how to get out of a recession by deploying opposite policies to the big government stimulus.

While the U.S. under Obama was attempting to get out of the recession by increasing government spending and expanding social programs, Germany has been cutting taxes, cutting spending, and restructuring its social programs.

This New York Times article from August 2010 details Germany’s economic recovery:

During the recession, Chancellor Angela Merkel resisted the palliative of government spending that the United States and some European partners felt was crucial to restoring growth.

By paring unemployment benefits, easing rules for hiring and firing, and management and labor’s working together to keep a lid on wages, Germany ensured that it could again export its way to growth with competitive, nimble companies producing the cars and machine tools the world’s economies — emerging and developed alike — demanded.

I’d like to weigh in on a few points… First of all, I am an immigrant ACTUALLY living in Denmark and there is quite a bit those on the other side of the world will actually never know until they live here.

- The “happiness” argument…if you ask any Dane on the street he will tell you he is happy. Happiness is subjective and fleeting for all human beings. However, their perception of reality is a bit off centered. The average Dane walks around like a deer in headlights, mentally-checked out, completely oblivious to preventing certain accidents, walking into people, and having no concept of personal space. They live a simple, small life equivalent to rural or town, off the beaten path living. Happiness is derived from simply knowing their Dankort will work, the weekend will arrive, sex is easy to obtain (but why is it so difficult to wear condoms, boys?), and they will have money to maintain their metrosexual look. It is equally so with the women who maintain bottled blonde coloring. Happiness is easiest for those who ask for nothing of life but this. If you have no goals, no hopes, or ambitions, you fit right in with Jante’s Law.

-Denmark is no stranger to exploiting foreign workers. If you find places under construction in Copenhagen and speak to the workers, you’d be surprised to learn many have no certificates for construction and do not speak Danish.

-Denmark still claims not to be socialist but it is fine. A small percent is rich, and I mean very rich. But the majority of them are middle-class with “working class” mentalities. Their education is free and mediocre and does not guarantee one a job in Denmark. They are not an imaginative, avante-garde, purposeful, people. They are successful in terms of Scandinavian culture, but the individual Dane lives a mediocre existence. What makes them successful is that there country, economy, or currency hasn’t been tested, but if it is, or should ever admire too much the democratic way, the sheep of Denmark will perish. Their society is not set up for change. This is evident in how nationals and foreigners ignore each other. They are collectivist maintainers by nature, not innovators. I guess if it is fine to go through life and not make any real achievements and not be motivated to. Oh, but hey! Where are you getting wasted Friday night?

- As for immigration, they have opened their doors to darker skin foreigners, which they show their “tolerance” by ignoring and speaking derogatorily in Danish about. This is how they show they are peaceful, they won’t hit you but they will condescend you. It is awful to be a muslim here, because in Denmark, it is *socially acceptable* to publicly hate Muslims or people from the east. They simply label foreigners as, and I quote by many, “Stupid immigrants who are too dumb to learn the Danish way.” They think foreigners are robbing their system when many are not even eligible for benefits excluding healthcare. They blame crime and the depletion of welfare on immigrants, whom must have citizenship/permanent residency in order to reap any of the benefits many of the Danes receive, even though they are out of, and/or refuse to work. Danes are blatantly intolerant, but it is considered bad taste to admit it. And unless you know them, they definitely won’t admit to it publicly.

– Strangely they live, as if oxygen for the brain, to compare Denmark to the US, and with Europeans, the UK. It is the worst display of envy ever. They don’t bother to research how US government is set up, only to compare their iddy biddy city nation to a monstrous sized nation. The reason the US is a superpower is because of capitalism, its military, GNP, GDP, and the strength its multicultural nation contributes. Denmark has specks of other nationalities, but cannot be considered cosmopolitan in this decade. They do not have the mentality for it.

-They are financially thriving above the UK and US––NOW, only because these two are in a recession, which the US has proven its ability to bounce back like no other nation and the UK, well, will take a bit of time. They lose their “educated” to other countries, which many of them must take a standard of living reduction, in order to survive in those other countries. If you are not used to competing in the workforce, earning your wealth out of skill, talent, or being better than the next man, how will they survive when there is no handout and hundreds who are better educated and more talented with cultural experience who apply for the same job? What was your GPA? And how does your university rank with the top in the world? In Europe? What are your conversational skills? How will you treat clients who are from different cultures? Who are Muslims or from the Middle East? If you dislike the US so much, why are you here asking us for a job? And blah, blah, blah,

I don’t mind the Danes at all. I just think the idea of success is subjective, and what it measurable needs to be measured equally and properly compared. Denmark needs to stop envying the US because they will never be the US…if nothing more than just not producing world leaders of industry. However, as long as their mentalities stay confined to this tiny glacier and doesn’t infect the rest world, all will be just fine.

As Obama threatens to veto budget cuts, Treasury Secretary Tim Geithner admits that Obama’s proposed budget is unsustainable:

With the president’s plan, even if Congress were to enact it, and even if Congress were to hold to it and reduce those deficits to 3% of GDP over the next five years, we would still be left with a very large interest burden and unsustainable obligations over time.

Watch Treasury Secretary Tim Geithner’s testimony here:

Furthermore, as Obama claims his budget “puts us on a path to pay for what we spend by the middle of the decade,” Budget Director Jack Lew admits it does no such thing. Instead, the budges is considered balanced only if we ignore interest payments on the debt.

Here’s what Lew says:

This budget would get us to the point where in the middle of the decade, we will be paying for our current expenses and we will be in what’s called ‘primary balance’. That means that the only thing that’s putting us into deficit is payments of interest on the national debt.

And the interest portion of the budget is huge. It’s the 4th largest budget item and in fiscal year 2009 amounted to $381 billion (see here). And now we’re in a time when interest rates are rock bottom. If those go up, we’ll see the interest on the national debt balloon enormously.

See Budget Director Jack Lew’s testimony here:

I propose they give away their fortune to the government, just like they want the rest of us to be forced to do. I also propose they give up their fortunes down to the $250,000 per year level, the level at which the politicians they support claim that you’ve got too much.

Having ten billion dollars and giving up nine is no big deal in my book because you’re still left with more money you can reasonably spend in a lifetime. I want to see them give up their lavish lifestyles and get knocked down to the middle class level.

That article carries a prime example for one of the reasons why taxing the so called rich will never amount to a significant revenue boost to the government, let alone generate enough revenues for an expansive welfare state. And of course, there are many, many more reasons why taxing the “rich” does not work out as advertised.

Any politician (ahm Obama ahm) promising to expand the welfare state, while reducing the deficit, and doing it all at the expense of families making over $250,000 a year, should be laughed at, ridiculed, and driven out of town in shame for the fool that he is. Or rather, those who believe him should be laughed at, ridiculed, etc.

And in the mean time, while we’re discussing taxes on families earning $250,000 plus, this is the type of thing the truly wealthy (and liberal leaning) are doing with their money: The Tax Haven That’s Saving Google Billions

And yes, the U.S. Treasury’s share of money kept off shore because of high corporate taxation in the U.S. is exactly zero dollars.

President Obama and other Democrats such as Nancy Pelosi are proposing to extend the tax cuts for the middle class only, i.e. to individuals with incomes of less than $200,000 per year or households with less than $250,000 per year.

For starters, there’s an instant red herring that comes to mind here. For years, my liberal friends were telling me that the EVIL, rich, scheming, menacing George W. Bush gave tax breaks to the filthy rich (i.e. his equally evil oil buddies) while leaving the poor and middle class out in the cold, enslaving them even more as they are forced to pick up the slack. So Obama and Pelosi’s proposal is a direct admission that all of this was utterly untrue. (But then again, I’m sure the liberals can find a million ways to re-spin their former spin.)

In fact, the Bush tax cuts skewed the tax burden even further toward the rich than before. How can this be true? It’s simply because the lower tax brackets where cut more than the upper ones.

Another question that comes to mind is why let any part of the tax cuts expire at all. The liberals love to cite the deficit as the reason, however the likely truth is more in line with the liberal ideology of class warfare. That’s because at best, the Bush tax cuts to the “wealthy” can account for only a tiny fraction of the budget deficit.

According to CBO data, Bush’s tax cuts account for 14% of the deficit. And the 14% figure is based on static scoring that assumes people do not change their behavior due to different tax rates.

However, in the real world, whenever there is a tax cut, at least some of it is recovered from an increase in the activity that’s being taxed. A decrease in income tax for example, encourages more income earning and less tax avoidance. And therefore, the actual figure assgning blame to the Bush tax cuts is even lower, if not arguably zero as tax cuts may spur enough new taxable activity to completely compensate for the decrease in tax rate.

At any rate, if we’re just talking about tax cuts to the top earners as defined by Obama, the 14% is cut in four to arrive at 3.5%, since those tax brackets account for only 25% of the cuts in dollar amount.

So eliminating the Bush tax cuts to the walthy can at most help reduce the deficit by 3.5%, a puny amount.

But doesn’t every little bit help?

Yes, it does, but if eliminating the tax cuts for the top brackets helps reduce the deficit, wouldn’t eliminating the tax cuts for the lower brackts help reduce the deficit even more since their share of the cut is 75%? Therefore, shouldn’t we let the Bush tax cuts expire for everyone then?

At this point economically minded liberals are almost certain to reply that raising taxes on the non-wealthy is likely to hurt the economy since they are more likely to spend any extra money they have, and therefore we shouldn’t do it.

But this does not satisfy the question because even if so, the wealthy earners are then the ones who are more likely to invest, expand or start a business, and create jobs. So why is household spending more important than investment and business development for the good of the economy? It’s not!

And in conclusion, that’s why letting the Bush tax cuts expire only for the upper tax brackets is pure hogwash based on class warfare ideology alone.

References (well worth a complete read):
Ten Myths About the Bush Tax Cuts
The Tax Cuts Didn’t Cause the Budget Deficit

Obama appointed yet another socialist/communist/Marxist/wealth redistributionist to his administration. This time it’s Donald Berwick, appointed to head Medicare/Medicaid under the new government health system. This appointee was not vetted by Congress, as it’s on recess.

Berwick on the British National Health Service:

Indeed,

any healthcare funding plan that is just, equitable, civilized, and humane, must, must, redistribute wealth from the richer among us to the poorer and less fortunate. Excellent healthcare is by definition redistributional. Britain you chose well.

So we must redistribute wealth to be excellent. Of course, the NHS never turns poor sick people down, and disease cure rates there are so high, they put the U.S. to shame, where people die on the streets you know! Not!

Oh, and how about this… The U.S. health care system is “unaccountable” and it plays “out in the darkness of free enterprise”.

You know, that evil dark free enterprise system, just horrible. They torture people in deep dark dungeons over there, and never bring any useful product or service to anyone. And it’s so unaccountable, that no one is ever sued for millions of dollars with the aid or Democrat lobbying attorneys.

A planned government system, on the other hand is always looking out for you! Those politicians and non-vetted Marxist appointees in the Obama administration never do anything to hurt the common good.

And undoubtedly all those free enterprise haters in the Obama administration are proof of Obama’s commitment to a laser like focus on job creation. Laser! Because no jobs are created by the free enterprise system and it’s only government that can crate productive long term jobs.

See Obama promise:

But now starting July 1, 2010, a new 10% federal tanning salon tax goes into effect. This tax is part of the new health care law.

So in fact, this is yet another example of the welfare state being supported by people other than “the rich.” A major theme on this website is that it’s impossible to support a large welfare state without putting the heavy burden on the middle class. Yet in every election cycle the Socialists/Democrats keep claiming just that, and people somehow buy into this deception!

The tanning tax is just the tip of the iceberg. There’s a slew of new taxes (on non-rich people) coming up in 2011 as the “Bush tax cuts” expire in addition to more “Obamacare” taxes down the line.

The Obama Administration represented the moratorium as a safety recommendation suggested in a report drafted by Interior Secretary Ken Salazar and peer reviewed by experts associated with the National Academy of Engineering. However, those same experts are saying that they have been misrepresented, and that the moratorium was added to the report after they had signed off on it. They noted that they agreed to a moratorium on drilling of new wells, but not on shutting down existing operations.

A June, 17th Wall Street Journal op ed piece chronicles this and explains why the drilling moratorium is actually detrimental to safety:

A big reason why those experts would have balked is because they recognize that the moratorium is indeed a threat to safety. Mr. Arnold offers at least four reasons why.

The ban requires oil companies to abandon uncompleted wells. The process of discontinuing a well, and then later re-entering it, introduces unnecessary risk. He notes BP was in the process of abandoning its well when the blowout happened.

The ban is going to push drilling rigs to take jobs in other countries. “The ones that go first will be the newest, biggest, safest rigs, because they are most in demand. The ones that go last and come back first are the ones that aren’t as modern,” says Mr. Arnold.

The indeterminate nature of this ban will encourage experienced crew members to seek other lines of work—perhaps permanently. Restarting after a ban will bring with it a “greater mix of new people who will need to be trained.” The BP event is already pointing, in part, to human error, and the risk of that will increase with a less experienced crew base. Finally, a ban will result in more oil being imported on tankers, which are “more likely” to spill oil than local production.

This is a prime example of how those who control government operate to perpetuate their own self interests rather than act for the “good of the people.”

Watch Pelosi’s comments here: