It’s an age-old problem in Washington, D.C.: Every few years or so there’s an economic slowdown, a recession, a bad jobs report, a slow recovery or something similar, and the hue and cry from editorial pages to the Oval Office is directed at Congress: “Don’t just stand there; do something!”
How easily they forget that Congress is most dangerous when doing things.
Government intervention in the economy has historically taken the form of taxation, increased regulation by a federal agency, or a stimulus bill passed by Congress. Disagreement over how to stimulate the economy is the root cause of much of the polarization between the political parties and the growing divisions among the American people.
The real issue at the core of this division is whether a dollar can do more to grow the economy and create jobs by remaining in the free market or by being taxed or borrowed and spent by Congress.
The Left strongly believes that government-controlled spending is the primary driver of economic growth and job creation. Their rhetoric may indicate support for small businesses, but their votes and actions invariably support higher taxes and more government spending. And they do not believe that America’s extraordinary debt presents any threat to future economic growth.
Leftists who advocate for economic stimulus through more government spending operate under an old Keynesian fallacy, which holds that government has the ability to allocate resources more efficiently than the market does, and that taking money from some and giving it to others—to encourage them to work, not work, to produce, or simply to stay in business—can “jumpstart” an economy. According to their line of thinking, $1 taxed out of the private sector can be worth more than $1 when the government puts it to better use; they call this phenomenon the “multiplier effect.”
Political theorist Frédéric Bastiat shot down this theory a full century before John Maynard Keynes popularized it on a global scale. He explained that there is no way to know what benefits an economy might have seen, what purchases might have been made, or which workers might have been hired if people had been allowed to keep their own money. Further, as economists Robert Barro and Charles Redlick explained in The Wall Street Journal, modeling of the multiplier effect frequently overestimates the magical “growth” in value that the government can squeeze out of a dollar. There is no data to support the claim that we can expect more than a 1 to 1 economic “return” on government spending.
In fact, it is long past time that Americans know the truth: A dollar taxed and spent by the federal government will deliver exponentially less economic benefit than a dollar left in the hands of the individuals and businesses that earn it.
In addition to government inefficiency and waste—as well as the inability of politicians and bureaucrats to know how best to spend our money—there are other factors that magnify the diminishing returns of government spending.
Because the federal government is already heavily in debt and borrowing nearly 40 cents of every dollar it spends each year, new stimulus programs are funded through government borrowing, which means that taxpayers also end up paying interest. And, to make matters worse, the Federal Reserve enables the government to borrow virtually all it wants by “expanding its balance sheet” (printing money), leaving U.S. citizens to deal with the negative impact of higher prices in the future (inflation). By the time a stimulus program based on more government spending is done, taxpayers are left to pick up the tab for the taxes and the borrowing—and their money buys less than it did before.
Another massive spending bill must eventually be paid for by taxes. And taxes not only remove a certain dollar amount from an individual, but they also displace economic activity – working, shopping, or investing – under the faulty notion that consumers don’t know the best way to use their own money. The real multiplier effect for the economy is when individuals produce something to earn more dollars, keep those dollars, hire more people, and spend and save more money, which creates more jobs for others.
Another problem with moving dollars from people to the federal government is that government doesn’t actually build anything with those dollars. Even when the government contracts with private companies to construct roads and bridges, the most it can do is rearrange and spend resources that are taken from one person (through taxes) to spend on someone else. Whether the resources are put toward a bridge to nowhere or a bankrupt solar company is simply a matter of taste. And no dollar goes through the taxation process unscathed: Lower take-home pay, lower buying power, and lower return on investments dampen the economy at the point of taxation. Americans paid an estimated $4 trillion in taxes in 2012—that’s $152 billion more than they spent on housing, food, and clothing combined. The country gets back less value than it puts into the government, no matter how “well-spent” by Washington.
In the case of businesses, government often carelessly injects itself into a given market—energy, technology, agriculture, and so forth—and picks winners and losers by handing out money (grants) according to politically expedient criteria. Apart from being inherently unfair, this practice ignores the fact that there are only two kinds of businesses out there: successful ones that don’t need a subsidy and unsuccessful ones that don’t deserve it.
Perhaps the largest long-term cost of government spending is that once Congress decides to spend more on something this year, that dollar amount might as well be chiseled in stone with a giant “plus” sign: Government expenses hardly ever go down. In fact, federal spending increased every single year between 1965 and 2009, and the Office of Management and Budget estimates increases for the foreseeable future. Even if a program expires, the dollar amount already contributes to the budget baseline for the next year. New spending is always added to what was spent last year. And, as noted before, spending must always be paid for by taxes, so a bad situation keeps getting worse.
There can be only one answer to these types of economy-“stimulating” proposals: Spending now and taxation later is not the solution to our economic woes. On the contrary, the less government spends, the better off we’ll all be. Centrally planned allocation and distribution of resources is not only demonstrably less effective than individual actors in the free market, but it also cuts short the economic value of each dollar in circulation. If legislators are serious about revitalizing our nation’s industries and getting Americans back to work, they need to focus on freeing up employees, businesses, and entrepreneurs from burdensome taxes and regulations, and let their money stay where it can do the most good: in their wallets.