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A Warning from Reagan's Economist
Why the proposed $700 billion stimulus plan could drive the country to economic ruin.
As you read this, our government is committing enormous sums of money above and beyond normal spending, solely to stimulate the economy and prop up failing companies and markets. These additional sums are huge by any reasonable measure, with estimates as high as $3 trillion in an economy with a GDP of about $15 trillion.
Here’s the bottom line: Instead of making things better, increased spending will only drive our economy further into the ground.
And there is still a lot more spending to come. First it was a $170 billion stimulus package in February of 2008, then material add-ons to both the housing and agricultural bills, followed by Federal Reserve asset swaps with Bear Stearns and a bailout of AIG (which, by the way, isn’t over yet) and then came the debt guarantees of Fannie Mae and Freddie Mac.
There is no tooth fairy. Every dollar given to someone comes from someone else.
Shortly after that, the administration anted up $700 billion in a bailout package, and now Obama, Reid, Pelosi and Bernanke want another stimulus package of $300 billion. Just this week the powers that be are debating bailouts for Michigan’s auto industry. With the slowdown in the economy, tax receipts are now projected to fall sharply. The logic here is totally upside down, and each new measure, far from helping the economy, does enormous damage.
It is true, as the proponents of these stimulus packages argue, that recipients of government checks will spend more than they otherwise would have spent. And, that increased spending will have a multiplier effect increasing spending even further. But this is only part of the story.
The government can only transfer resources; it can’t create resources. There is no tooth fairy. Every dollar given to someone comes from someone else. The government can’t bail some people out of trouble without putting other people into trouble, plus a hefty “toll for the troll.”
In the case of last February’s stimulus package, the government literally borrowed an extra $170 billion and at the same time sent out checks to the transfer recipients totaling $170 billion. The result was a $170 billion increase in the amount of bonds held by the public, accompanied by a $170 billion increase in the current value of future taxes to pay interest and principle on the additional debt.
From the standpoint of accounting, the government is $170 billion further in the red, and taxpayers are liable for an additional $170 billion worth of taxes. Therefore, for every dollar of transfer payment there’s at least an equivalent dollar of future tax liabilities. Those people with the increased tax liabilities will spend less, thereby dis-employing people who had been supplying them with goods they’ll no longer buy. And the reduction in spending of those with higher tax liabilities will lead to a multiplied reduction in total spending equal to and fully offsetting the increase in total spending from the recipients of government checks. There is no stimulus from the stimulus programs!
To see this point more intuitively, imagine what the “stimulus effect” would be if they borrowed the $700 billion from the same people to whom they gave the $700 billion and then promised to raise their taxes by enough in the future to pay off their bonds. Where’s the stimulus in that?
This point is hugely important. For the proponents of increased government spending to argue that their policies will increase output, it is absolutely essential that the increased spending by transfer recipients more than offset any decline in spending by others. If the income effects of fiscal policy net to zero, there is no rationale for these spending policies. And, the income effects of fiscal policy do indeed net to zero.
The diffuse and imprecise nature of just who bares the increased tax liabilities makes the point difficult to understand. We all know who benefits from government programs: mortgage holders, undercapitalized banks, auto companies, low-income earners and the like. But who bears the increased tax burden? That’s a far trickier question, the answer to which I don’t have. But in the aggregate I do know that for every beneficiary of government spending there is someone who has to pay for it. As Milton Friedman so wisely noted, “There ain’t no such thing as a free lunch.”
What I don’t really know is just how far this process can go and just what it will take to stop this vicious cycle. Combine the unintended consequences of a flawed model with a crashing economy in ever more desperate need of beneficial policies, and the results are lethal. The old adage “if you don’t like government problems just wait till you see government solutions” has never been truer.
Dr. Laffer is chairman of Laffer Associates and co-author of "The End of Prosperity: How Higher Taxes Will Doom the Economy—If We Let it Happen," recently published by Threshold. He’s best known in economics for the Laffer curve, showing the relation between tax rates and revenue take.
John Talks Joe
Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.
I don't think anyone with any hand in the now-debunked theory of Reaganomics is in any position to offer solutions for the economy.
No Joke! I find it unbelievable that the Daily Beast would even post an article from this clown.
Government Spending is one of the few mechanisms the government actually has control over to drive the economy forward and to grow GDP.
Why would the Daily Beast give this guy a microphone?! This guy ignored every sign that the real estate bubble was about to burst and our economy was going to fall into a tailspin. Just watch his debate with Peter Schiff to see what an ingoramus he is. Good job Art, did you pay off your bet with Schiff?
http://www.youtube.com/watch?v=LfascZSTU4o
I can't believe this guy!! Just a few weeks ago he was praising Obama on the Bill Maher show. It is his stupid curve that got us into this mess along with his supply-side economics.
The eminent economist Art Laffer that said Peter Schiff completely off base and denigrated him for saying the economy was going to tank...two years ago? Yeah, he a laffer on this video. http://www.youtube.com/watch?v=2I0QN-FYkpw
Amazing how Republicans suddenly start worrying about government expenditure. We're still spending $10 billion a month in Iraq, people.
It's also a lie to say the government can't create resources: a healthy, educated populace is the best resource there is. Ask Europeans, whose populaces aren't wiped out by health care costs or crushing student debt. Access to healthcare and affordable education is a postive investment in a country's best resource- it's own people.
...so we should stop spending during a recession? What about the returns on value for the money out of the 700 Billion thats supposedly destined for infrastructure and educational development and will yield a return on investment? The failure of even republican administrations to cut taxes along with spending (or even come close to a balanced budget) make it difficult to accept the conservative economic theory as realistically implementable, and I'm surprised that this point was not brought up enough during Dubya's time.
Hard to trust the guy who contended two years ago that "the US economy has never been in better shape" and goes on to deny any possibility that all the stuff that has since exploded could explode. He has 0 credibility. Here's the tape: http://www.youtube.com/watch?v=2I0QN-FYkpw
http://www.youtube.com/watch?v=2I0QN-FYkpw
I think Peter Schiff shows how far off base Laffer really is. I trust the words coming out of Laffer's mouth about as much as I trust Bush's words.
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Who cares what any Republican, let alone a Reagan advocate thinks? Anything Obama does will be a step in the right direction as opposed to the Bush debacle which bankrupted and trashed our country. Bush not only turned a trillion dollar surplus into a trillion dollar deficit, but has turned America into a country owned by foreign interests and a corporate hegemony. Hopefully, Obama's policies and presidency will fix this. The question is can he balance the attempts toward a healthy economy with a healthy environment.
Please go to youtube.and find the clip with Arthur Laffer mocking Peter Schiff for predicting the current economic crisis. What an arrogant clueless man.
Dr. Laffer's ideas failed in his preferred playground, the free market. He needs better ideas.
Free markets can help us. They are why we can buy goods at low prices in retail chains. But free market systems fail because time works against them. They don't correct quickly enough.
Alan Greenspan confessed to the fallacy of his assumptions. You should do the same.
Wasn't Heinlein the one who coined TANSTAAFL, in "The Moon Is a Harsh Mistress"? His use certainly predates the earliest use in any economics writing.
Laffer's ideas failed in his preferred playground, the free market. He needs new ideas. Alan Greenspan admitted to the fallacy of his assumptions. Laffer should do the same.
Please see Laffer's debate with Peter Schiff - Laffer dismissed any major recession possibility due to excessive borrowing and the depreciation of the housing market. It makes his opinions rather dubious.
http://video.google.com/videosearch?hl=en&client=safari&rls=en&pwst=1&r esnum=0&q=peter schiff&um=1&ie=UTF-8&sa=X&oi=video_result_group&resnum=4&ct=title#
Dr. Laffer has shown himself to be rather short-sighted over the years; the Laffer Curve, which is named after him, is one of the most questionably counter-mathematical pieces of academic economics. While I agree with him that borrowing will cost us more in the long run, as an economist he must surely understand the concept of leverage as an investment tool; you have to consider what our government is doing is essentially the same thing someone does when they invest in a stock on margin, you are taking a certain risk with the hope of long term gain. We simply cannot stand by idly and watch our economy crumble, we have to use deficit spending as a tool for economic stability. The real question is not whether or not we should borrow money to stimulate the economy, but rather it should be a question of how much we really need to borrow and where it is best spent. To believe that we can get ourselves out of this mess without massive governmental borrowing is to disregard every historical model that can be considered. Although this point of view shouldn't be surprising coming from a man who pioneered absurdist economics.
Please see the following debate with Laffer and Peter Schiff - it is very illuminating!
http://video.google.com/videosearch?hl=en&client=safari&rls=en&pwst=1&r esnum=0&q=peter schiff&um=1&ie=UTF-8&sa=X&oi=video_result_group&resnum=4&ct=title#
I must say that I just loved Reagan's economic policies. I am being sarcastic!
His "trickle down" theory, unfortunately never seemed to drip in our direction. Financially, for us his tenure was the worst we have experienced, until the current Bush.
I would not give credence to anyone involved in shaping Reagan's economic policies. The prior practices that have served us or sunk us can no longer be utilized.
I hope for a true paradigm shift for the 21st century instead of a regression to some of the practices that keep us mired in 20th century incompetence and fiscal stupidity.
I wouldn't discount an economist's opinion just because he was associated with a poor economic plan. Sometimes the situation necessitates one plan, while other times implementing that same plan will be disastrous. And as the saying goes, even a broken clock is right twice a day. This is a man who has spent his life studying, theorizing, honing his intuition. Don't take him lightly.
That said, I take issue with some assumptions he makes. For example, it doesn't seem to me that the money the government is using to bail out companies is necessarily going to be paid by us. It's possible that I have a blind spot and I'm being irrational; it's also possible that the media's highlighting of the bailout, but not the potential increase in taxes, is coloring my opinion. Economists tend to assume rationality and a perfect flow of information.
But maybe I'm right. Perhaps the government will simply run up the national debt, and maintain it at those higher levels till I die, and I'll never have to face the consequences of the bailout. Also, I'm not on the upper portion of the income scale, so perhaps I'll consider the increase to my taxes to be irrelevant. It's easier to ignore a slow, gradual increase in your taxes than to ignore a massive bailout.
Besides, if a major bank crashes, with all the jobs lost, the confidence lost, and paying all the FDIC-owed money probably more than offset the money we spent just saving the bank in the first place. As long as they don't screw up again.
And maybe I'm wrong. Perhaps we will have to pay the money we've already spent in the near future. It's so dependent on the state of the economy at the time, the nature of the tax increase, and myriad other factors in the world that the impact is hard to determine. But taking action in a reasonable direction inspires confidence, and one certainty is that all confidence is lost, so will be all of Wall Street. And with it, most of Main Street.
Hmmm... I didn't notice any solutions in this article, just the typical republican tax cuts. Secondly, there is historical precedent to suggest that increased government spending can have a positive effect on the economy. Thirdly, you miss the point of what might have happened without the bailouts. Using your example if the government borrows 700 mill, loans it out, and promises to raise taxes to recoup it, while wealth may not be created THAT may prevent the collapse of certain industries or prevent deflation or a credit freeze or any other number of outcomes which would be catastrophic.
BUT to your main point, you do have a point in that the solution for growth is not in transferring wealth but in creating wealth. And you're right, the government doesn't need to spend, IT NEEDS TO SPEND WISELY. For instance, infrastructure. Using tax money to build a new electricity grid, for a example IS a TRANSFER or wealth. HOWEVER that new infrastructure allows for wealth to be CREATED in ways that it could not be prior to the new infrastructure being built. There are thousands of other examples in which transferring wealth to build, create, or invent to achieve certain goals will open new avenues for wealth creation. It's the difference between government spending (futile) and government investment. Bush spent tons (and tons) of money, and to your point we didn't see any creation of wealth, but Bush did not INVEST.
So therefore Obama's administration needs to insure they spend our tax dollars in such a way that their expenditures will lead to creating wealth so they are not merely pushing dollars around.
"those people with increased tax liabilities will spend less..." Nonsense. Clinton raised taxes two to three percent which is what Obama is talking about. These increases didn't stop consumer spending back then, they accelerated it. Clinton mostly targeted the middle class and the poor for tax relief; they were able to spend more, thus making the rich guys richer, who in turn - with their higher tax burden - spent more. I realize this guy is talking about a different kind of tax - a transferred tax that occurs during a stimulus in the form of a deficit, ergo creating a future burden on the taxpayer. The fact is that sending a $300 check to people can't do anything. But a massive industrial stimulus - therefore, not in the form of lame checks sent to individuals, but in the form of real investment to promote job creation and innovation is very different, and the long term benefits far outway the costs to the taxpayer. Increased tax revenue to the gov't will ultimately help pay down the deficit and the debt just as it did during the Clinton years. How to solve the problem: Educate and innovate. Obama gets it.
It should be Arthur Laughable. The man is a charlatan.
Why should ANYBODY care what this moron thinks? If being wrong should disqualify one from being listened to, this snake oil salesman has established a personal conclusive presumption against anybody ever listening to him.
Thank you.
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