Friday Stack: Can we spend our way out?

by Rocket Finance

ronald-reagan

Our great country is about to take on another $800 billion to $1.2 trillion in debt. The United States of America is the most successful experiment in human governance. We took the radical ideas of England’s Magna Carta to a whole new level. For decades, we have led the world in compassion, innovation, creativity, hard work and a love of freedom.

Historically, this country rewarded those who took risks or worked hard. This country never promised a comfortable life for everyone – it only promised man the freedom to pursue happiness – equality of opportunity, not equality of outcome. Millions of people have flocked to our shores to try their hand at fashioning a life for themselves. Each citizen was given more control over his destiny than at any other time or place in history. The entire free world – even much of the “un-free” world – has come to depend on us for protection. The world depends on us when disaster strikes – even our enemies. When an earthquake hits Iran or a tsunami occurs in the Indian ocean, Americans send health. The world depends on our free markets. Our standard of living supports the economies of almost every other country in the world and we still give billions of dollars away every year in Africa and other third world countries. Has the US of A made mistakes? Of course, show me a country who has not.

It is critical that we do not lose sight of what has made us great. There are many principles – religious freedom, freedom of speech, and more. The founding fathers sought to set up a nation that honored and promoted what was best in man. They sought to release his creativity and desire to do the best for his family with what he had. Capitalism and a belief in free markets, while not perfect, is also the best economic system devised by mankind. The evidence for this is all around us. I am not rich. I have no great plans for riches, however, I want to be the one making that decision, not a government bureaucrat.

I hope you have been following the news over the past months. If you are still wondering what is going on, I hope to share a few links to recent stories and quotations that will help to inform your thinking.

First a quotation from Henry Morgenthau, President Franklin D. Roosevelt’s closest friend and treasury secretary. Here is what he said before Congress in 1939 after eight years of the New Deal:

“. . . And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises … I say after eight years of this Administration we have just as much unemployment as when we started … And an enormous debt to boot!”

Government spending will not solve our economic problems. Read Five Myths about the Great Depression by Andrew Wilson. Our country has tried to spend its way out of trouble before. Which leads us to a quote (read the whole speech, it is inspiring!) from another great president, Ronald Reagan:

In this present crisis, government is not the solution to our problem; government is the problem. From time to time we’ve been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. The solutions we seek must be equitable, with no one group singled out to pay a higher price.

Now let us examine what has happened over the last two weeks in a little greater detail:

Breitbart: The new bill will put an average of $13 per week into the pocket of the average worker.

Wall Street Journal: The new bill will bring back welfare as we knew it before the Welfare Reform Act under President Clinton.

YouTube: Hundreds of economists oppose the new legislation.

Washington Times: Government contracts only go to companies with unionized employees.

Human Events: You and Republican Senators do not get to read the bill before it is passed. They should have at least let the people who voted for President Obama read it.

Bloomberg: The single worst provision in the entire bill. If you thought private health care was bad, just wait until you read what Tom Daschle, who was almost our Health and Human Services Director, and others like him have planned for our elderly and other people who are not valuable enough for advanced care.

So there you have it. Hopefully our children and grandchildren are not too angry with us for handing then over $1 trillion in debt when we panicked in the face of 7% unemployment. Unfortunately, they might be facing far worse problems because of our spendthrift ways.

If you believe this bill will revitalize our economy, I sure hope you are right. If you oppose this bill, even though it has already passed, be sure to let your voice be heard by contacting your elected officials or checking out nostimulus.com.

  1. 14 Responses to “Friday Stack: Can we spend our way out?”

  2. By David on Feb 15, 2009 | Reply

    Where was the outrage over the $700 billion that Bush gave the banks? These same economists and right wingers handed that money out like candy, no strings attached.

    Will this work? Who knows. But we could not just sit back and do nothing.

  3. By rocketc on Feb 15, 2009 | Reply

    There was all kinds of outrage on the right when the $700 billion went down, in fact, it is a huge reason why many conservatives did not vote in the last election. Don’t confuse “Republican” with “conservative”. Bush admitted that he forsake his “free market” principles both last fall and when he pushed for unnaturally low interest rates.

    Basically, the same Congress has given us both bills. If you look around, most economists are saying that doing nothing is preferable to spending more money.

    Did you see the quote from FDR’s treasury secretary in the above article. Government spending did not work to end the Depression. Government spending did not work to solve Japan’s crisis in the 1990’s and government spending will not work here. Only the growth of the private sector can solve our financial problems.

  4. By My Life ROI on Feb 19, 2009 | Reply

    I think that a lot of conservatives bring up the New Deal in an attempt to discredit government spending as a tool to get out of a recession.

    However, in the same breath these people will say that what got us out of the depression and recession was the war. What did this war do? Increased government spending substantially!

    Keynes was a huge critic of FDR for not spending enough money. And FDR was openly reluctant to increase government spending beyond what he had raised it to. Keynes told FDR he needed to get the levels to 50%+… which didn’t happen until the war.

    “Yet despite New Deal programs and some aid to the states, total government spending — federal, state and local — as a share of the economy throughout the 1930s remained at just under 20 percent. (Today, total government spending is more than 35 percent, a larger buffer against weakness in the private sector.)

    Keynes left equally disenchanted, telling Perkins that he had “supposed the president was more literate, economically speaking.”

    It would not be until the early 1940s, with the beginning of World War II, that a strong dose of Keynesian medicine was administered to the American economy. By 1942, total government spending as a share of the economy rose to 52 percent, and peaked at nearly 70 percent in 1944, when unemployment fell to 1 percent.”
    Source: http://www.iht.com/articles/2009/01/27/business/27fdr.php (this is posted in many different places)

    Being that our government spending is at a higher starting point… 70% is not an unreasonable number.

  5. By My Life ROI on Feb 19, 2009 | Reply

    Oh, and I want to bring your attention to one simple equation that many people forget. But I am an economics dork…

    GDP = C + I + G + (X − M).

    When consumption and investment go down, as they have, how do we either keep GDP the same or even increase it?

    The math is simple… we either have to massively increase exports and decrease imports (not likely) or increase G… government spending.

    Arguing politics is silly, which is why I have avoided that. I can assure you my position here is not political! 🙂 Look forward to your reply

  6. By rocketc on Feb 19, 2009 | Reply

    War is a completely different kind of spending. The reality is that these are real jobs – there is real demand for these services. The Obama jobs are “make work”. Furthermore, the constitution gives our government the task of defense, it is a direct government responsibility. Most of what is in the Reinvestment Act is outside of what our government was originally intended to do.

  7. By rocketc on Feb 19, 2009 | Reply

    Here are a few more numbers: the average household in this country will get an average of $400 more dollars in their yearly salary, but they will also acquire $7500 to $10000 more in national debt.

    The Reinvestment package spends an average of $250,000 for every job it creates.

    If government spending is the answer, why not spend another 2 or 3 trillion dollars? Why not give every American $1M in cold, hard cash? It does not make sense and this type of spending is going to make things worse in the long run by devaluing our currency.

  8. By rocketc on Feb 19, 2009 | Reply

    I don’t have a problem with the government doing nothing. Unforunately, the American people is starting to depend more and more on government in order to solve everyday problems. What happens when that government is bankrupt? Historically, this has been a country of people who solve their own problems or depend on networks made up of their families, churches or other local charities. This encourages innovation, creativity, and hard work – the backbone of our society.

  9. By My Life ROI on Feb 19, 2009 | Reply

    GDP = C + I + G + (X − M).

    What do you suggest the USA does to turn the economy around, then?

    And Keynes would have argued that a New Deal that was 3 times as large would have had the same effect as the war.

    Our infrastructure is extremely outdated. That is REAL work. I think the bill they passed is laughable because of how little money they put towards new deal esque work.

    And if you really think the gvt only exists for defense… I would think you have a hard time finding a politician you like 🙂

    Just look at China… they are spending more than $500 billion in JUST infrastructure. If you take a look at the financials… a lot of companies are being propped up by China’s demand right now.

  10. By My Life ROI on Feb 19, 2009 | Reply

    All economic principles point to government spending.

    Here is another example:

    Tax multiplier = (Delta in taxes * -MPC) / (1 – MPC)

    Govrnment spending multiplier = (Delta in government spending) / (1 – MPC)

    mpc = marginal propensity to consume

    If you set MPC to .7 and decrease taxes by $30,000,000 … output goes up to $70,000,000

    If you set MPC to .7 and take that same $30,000,000 and put it into government spending… output goes up to $100,000,000

    The statement “Why not give every American $1M in cold, hard cash?” shows a misunderstanding of government spending in an economic sense…

  11. By rocketc on Feb 19, 2009 | Reply

    So what is the cut-off? At what point does government spending cease to be useful in growing the economy?

    If spending $10,000 per citizen is good, why isn’t spending $100,000 better?

    Did the USA become the greatest economy in the world through government spending?

    By the way, one of President Obama’s top economic advisers wrote a pretty convincing paper that theorized and supported the fact that cutting taxes increased the economy by a multiplier of 3, while government spending was closer to a one to one ratio.

  12. By rocketc on Feb 19, 2009 | Reply

    By the way, your formula does not take into account future government debt, interest, and the fact that increased taxes always follow increased government spending.

    You are also not accounting for devaluation of currency.

    What happens to your formula when everyone is working for the federal government? Who is going to generate the revenue in order to support that kind of bureaucracy.

  13. By My Life ROI on Feb 19, 2009 | Reply

    I would hardly call it my formula :p It is basic economic principle!

    Which economic advisor? Which paper? Would like to look at it… Because he should be fired. We are in a deflationary environment and he wants to cut taxes. lol… And you mention increased taxes follow increased government spending… so? Taxes were much higher than they are now 40 years ago.

    To put it simply:
    -Right now we do not have enough demand
    -Tax cuts increase demand by giving people more money
    -Tax cuts also increase the supply of labor (working today is more attractive than working tomorrow when taxes go back up)
    -Since supply of labor is going up at the same time as demand for product is going up… the gap is not narrowing
    -Normally the Fed would just lower interest rates…
    -They can’t. Rates are too low.
    -Deflationary tailspin

    I just want to make sure you realize… I do not approve of how our government is run. There is too much bloat. There is too big of a bureaucracy. I would love to make the government smaller. BUT I know that now is not a time in which that could possibly be done without exasperating the current crisis.

    Do you want to take this discussion off of the blog so that we don’t flood your board with comments?

  14. By rocketc on Feb 20, 2009 | Reply

    🙂 I don’t have that many comments here and I have been having this conversation for almost 25 years in one place or another.

    Christina Romer is Obama’s advisor who made a strong case for tax cuts and against government spending. A quote from the paper: “Tax cuts provide powerful short-run stimulus to the economy, but there is little evidence that tax cuts restrain government spending.”

    Yes, taxes were higher 40 years ago. Have you never heard of the 70’s, stagflation, high unemployment and 20% interest rates? Reagan cut taxes and changed all of that pretty quickly.

    Decreased taxes result in greater economic growth – more jobs and higher government revenue. The biggest problem is spending, the more govnernment spends, the farther into debt it goes, more waste is created and finally, this is the worst effect:

    More and more people become dependent on the government for every part of their daily life. As a result, government can never contract until is goes bankrupt . . . and then everyone who was a dependent, is screwed.

  1. 1 Trackback(s)

  2. Feb 27, 2009: How Government Spending IS Different | My Life ROI, Getting the Best Return On Life

Sorry, comments for this entry are closed at this time.