Thursday, July 8, 2010

Time to Spread the Manure

"Money, pardon the expression, is like manure. It's not worth a thing unless it's spread around, encouraging young things to grow."
Dolly Levi in Hello Dolly!

It's true. Growth is good. Growth is what has distinguished America over the centuries. It is also true redistribution is bad. Redistribution is what defined the failed Soviet Union. Dividing up an increasingly smaller pie doesn't take you very far. Dolly Levi knew it. John F. Kennedy and Ronald Reagan knew it. So did ole Silent Cal Coolidge. Now would someone please tell Mr. Obama and Ms. Pelosi?

Mr. Obama's redistributionist tendencies were well documented during the campaign in his oft repeated interchange with Joe the Plumber where he confessed he wanted to "spread the wealth." Ms. Pelosi has made her tendencies clear with her recent statement regarding unemployment benefits: "It creates jobs faster than almost any other initiative you can name." She added that unemployment benefits have the "double benefit" of helping the jobless and serving as a "job creator" on the side.

Sounds marvelous. A win win, right? Wrong. Ms. Pelosi's incoherent logic and Mr. Obama's "spread the wealth" philosophy are not just bad economic policy they are dangerous to America's future. Read in its entirety, Dr. Arthur Laffer's op-ed piece in today's The Wall Street Journal entitled: "Unemployment Benefits Aren't Stimulus." No one can explain economic principles in a more common-sense, logical and entertaining way that Dr. Laffer. No one else can present the case so clearly as to why Washington's favorite policies simply won't work. History, of course, could short-cut the arguments but Laffer's analysis is much more accessible.

A few excerpts:
  • The flaw in their logic is that when it comes to higher unemployment benefits or any other stimulus spending, the resources given to the unemployed have to be taken from someone else.
  • The government doesn't create resources. It redistributes them. For everyone who is given something there is someone who has that something taken away.
  • While the one person who is unemployed may "buy" more as a result of unemployment benefits, the other person from whom the unemployment sums are taken will "buy" less. There is no stimulus for the economy.
And that is the best way to think about government spending. Since the government produces nothing (unless you count grief and frustration) the best way to think about government revenues (in the form of taxes) is that they come at the expense of the production of private citizens. Any amount of tax paid is money I can't spend or save for retirement or invest in my business.

In February I wrote a blog entitled: "Superbowl of Government Spending--A Zero Sum Game" where I discussed James Payne's 1991 book, The Culture of Spending. In that book, Mr. Payne introduces the concept of the "bureaucratic rule of two."

He writes, "When the government purchases what people can buy for themselves, two additional costs are introduced: the cost of taxation, including the distortion of incentives governing production; and the cost of administration, including the distortion of incentives governing consumption. Calculating these costs is quite difficult but preliminary estimates suggest that for each dollar the federal government recycles through the taxation-subsidy system it wastes more than one additional dollar."

Citing research studies at the time on the taxation side of the equation (cost is about 60 cents for every dollar collected) and the disbursement side (50 cents for each dollar spent) Payne ,and we, can conclude that government production of a typical good or service in 1991 cost twice as much as the same items produced in the private sector. Hence, the "bureaucratic rule of two." Not only is the government sucking capital from the private sector which produces our food and clothing and iphones and the majority of our JOBS, but each dollar collected costs more to collect than the value of that dollar. Or as we like to say in the private sector (mostly when referring to government bureaucracy): it's a lose lose.

If the above argument isn't compelling enough, consider this final thought also from Dr. Laffer's op-ed: "Since late 2007 the federal government has spent somewhere around $3.6 trillion to stimulate the economy. That is a lot of money."

With very little to show for it.

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