Government Stimulus Spending — BAD: We Need Fewer Regulations, Entitlements

This piece appeared as one half of a pro/con debate with Nick Estes, formerly of NM Voices for Children. His column can be found here.

President Obama is again touting the wonders of government spending and what positive impacts his “investments” in the economy would have if the Republicans would go along.

Unfortunately for Obama, government over-spending is a problem, not a solution when it comes to America’s economy. If Obama wants to get the economy moving, he needs to repeal the job-killing ObamaCare law, work with Paul Ryan to reform entitlements, reduce the burden regulations place on the economy, and embrace America’s newfound role as a major producer and exporter of energy.

Every penny of added government spending adds to America’s debt burden. More importantly, government spending typically redirects resources away from the more efficient private sector and into less efficient government.

Take the so-called “stimulus.” The Congressional Budget Office (CBO) says it “created or saved” 2 million jobs. That may be true, but the stimulus spent $787 billion. That’s $393 thousand per job saved or created!

Set aside the fact that “saved or created” is deliberately opaque language that provides few actual details. Also, consider the sheer madness of taxing and borrowing $393 thousand from productive areas of the economy in order to create a single job.

Keynesians argue that increased government spending will spur the economy. They believe government spending has a “multiplier effect” as it circulates through the economy and that this leads to economic growth. History shows that they are very wrong.

If the Keynesian stimulus model worked so well, America would be booming right now. That’s because America has been following the Keynesian model for years. The federal budget has more than doubled since 2000. Back then, Washington consumed about 18 percent of the economy; today it consumes nearly 23 percent (an increase of more than 27%). The unemployment rate in 2000 hovered around 4.0 percent as compared to the current rate above 7 percent. Where’s the stimulus?

The aftermath of World War II provides another useful example. Federal spending which rose to more than 40 percent of GDP during the War, was reduced to just 12 percent by 1948. This, to the consternation of Keynesians who argued that reduced government spending would lead to double-digit unemployment rates. In reality, unemployment remained under 4.5 percent in the first three postwar years — well below the 20th century average.

Rather than increasing spending, America’s political leaders might consider addressing government regulations. According to Ten Thousand Commandments, a report published by the Competitive Enterprise Institute, Americans spent an astounding $1.806 trillion in 2012 complying with federal regulations. This lost money does not increase wealth or pay down America’s massive debts.

Address entitlements!

Social Security’s problems were inevitable. As a “pay as you go” system of generational transfer – lacking any investment mechanism – the system was doomed to have serious structural problems once fewer people paid in than were receiving benefits. The problems are real and go beyond deficit implications. Social Security will consume 30% more of the entire US economy in just a few decades.

Social Security’s biggest problem is the lousy rate of return which amounts to about a third the rate of AAA corporate bonds for most retirees. We can do better by reforming the system with private accounts that provide actual ownership and superior rates of return.

Medicare and Medicaid are in even deeper crisis, but the solution is actually simpler. We need to move beyond Washington’s “one-size-fits-all” mentality and allow the 50 states to experiment with innovative ways to improve care and reduce costs. To say that these government health care programs are mere purchasers of health care in a “free market” is laughable. Government now accounts for more than half of all health care spending.

More government spending will not help America’s economy. The Keynesian model has failed. It is time for our political leaders to make tough choices by deregulating the economy and reforming entitlements in ways that improve taxpayers’ return on our investments.

Paul Gessing is the President of New Mexico’s Rio Grande Foundation.