American Elephants


The Battle Ahead. by The Elephant's Child

The federal debt is the highest it has ever been since the end of World War II, and it is projected to go up even more.  The deficit picture is also dismal.  Democrats’ spending binge hopefully ends today.  Tomorrow the new Republican controlled House of Representatives takes control of the purse strings.

President Obama has said that his New Year’s Resolution is to get the deficit under control and the unemployment rate down.  He’s a little late with that, and it’s fairly clear that he has no idea how to create jobs.

Democrats and Republicans approach any policy differently.  Democrats want to eliminate or relieve the injustice in the world.  And they see a lot of it.  They don’t think it is right that some people are poor while others are rich, and if they can just take enough of the wealth of the rich, they can make the poor less poor. Their goals are noble.  They go through life distressed at all the injustice and unfairness, but comforted that they are working on their shining goals. Because their goals are so righteous, they regard evidence produced by their opponents as false efforts to keep them from their goals.

The results of a Democrat Congress’s insistence on ignoring evidence are in.  The work of John Maynard Keynes eighty years ago began with the idea that an economic shock had left demand persistently and significantly below potential supply.  Government spending could make up for this shortfall by adding money to the economy.  It didn’t matter how the money was spent.  Keynes is said to have claimed that a government program paying people to dig and refill ditches would provide new income for those workers to spend and circulate through the economy creating more jobs and more income.

Mark Zandi of Economy.com spelled out a simple menu that would allow Congress to decide how much economic growth they wanted and then apply the appropriate option:

Zandi asserts that for each dollar of new government spending: temporary food stamps adds $1.73 to the economy, extended unemployment benefits adds $1.63, increased infrastructure spending adds $1.59, and aid to state and local governments adds $1.38. Jointly, these figures imply that, in a recession, a typical dollar in new deficit spending expands the economy by roughly $1.50.

Over the past 40 years, there has been extensive evidence that deficits do not represent “new money.”Where does government get the money?  It has no money of its own. Every dollar must be first taxed out of the economy.

This is probably where Nancy Pelosi got her ridiculous idea that extended unemployment benefits were one of the best ways to create jobs. Well, we did that and now simply to stabilize debt levels at their current level would involve an immediate and permanent 23% increase in all federal tax revenues or equivalent cuts in government expenditures, according to CBO forecasts.

The natural impulse in a divided government would be to split the difference. But new research that analyzes the history of fiscal consolidations in 21 countries of the OECD (Organization for Economic Cooperation and Development) over 37 years. Some fixed their fiscal problems many did not.  The successful recipe for success relied almost entirely on reduced government expenditures, while unsuccessful ones relied heavily on tax increases.

The typical successful fiscal consolidation consisted of 85% spending cuts.  In contrast the typical unsuccessful consolidation consisted of 53% tax increases and 47% spending cuts. The research cited by Briggs, Hassett and Jensen shows that the typical successful consolidation allocated 38% of the spending cuts to entitlements and 29% to government salaries.

The battles are going to be interesting. Democrats will be asked to give up some treasured ideas in order to rescue the economy.  It is doubtful that they understand that the economy needs rescuing.  They still seem to think that their accomplishments are something to be praised.

Democrats’ outrage at the reading of the Constitution demonstrates the width of the divide between the parties.  It’s not going to be easy.


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