On the Arkansas Times Blog this morning Max Brantley posted some words of Paul Krugman that lamented that President Obama may be considering cutting back on federal government stimulus efforts and may even cut present government spending. I think this would be a prudent action because the “broken window” theory has never worked.

Using stimulus funds to help build a walking bridge in Little Rock may look nicer than a broken window but the principle is still the same and it has never worked in the past, so why should it work now. Brian Riedl of the Heritage Foundation shows in an article I posted below both that the stimulus has failed and why it has failed.

Paul Krugman grows wearier of President Obama’s move to the right, particularly recent pronouncements on the budget.

One striking example of this rightward shift came in last weekend’s presidential address, in which Mr. Obama had this to say about the economics of the budget: “Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.” 

That’s three of the right’s favorite economic fallacies in just two sentences. No, the government shouldn’t budget the way families do; on the contrary, trying to balance the budget in times of economic distress is a recipe for deepening the slump. Spending cuts right now wouldn’t “put the economy on sounder footing.” They would reduce growth and raise unemployment. And last but not least, businesses aren’t holding back because they lack confidence in government policies; they’re holding back because they don’t have enough customers — a problem that would be made worse, not better, by short-term spending cuts.

People just don’t understand how wasteful government can be and how giving government more control of our lives destroys much of the freedom that we should have. This series on the stimulus demostrates these points. This whole series started because of a post I did on July 6, 2011 about an post in the Arkansas Times Blog.

On July 6, 2011 on the Arkansas Times Blog I posted concerning the walking bridge in Little Rock that stimulus funds help build:

Tim Griffin spoke in Central Arkansas recently at a townhall meeting and mentioned that a couple of million of stimulus money went to build the walking bridge in Little Rock that will be opening this summer. Then he went on to show how it was silly for our government to try to stimulate the economy with our national credit card.
Steve Chapman rightly noted in his article “Stimulus to Nowhere” noted:

The federal government took out loans that it will have to cover with future tax increases … so states don’t have to. It’s like paying your Visa bill with your MasterCard.

The person using the username “Arkansas Panic Fan” responded:

Bridge = good stuff for Central Arkansas. Not sure why it is a bad thing. It is your money at work here being used for your benefit. I applaud this type of government activity. This is the type of project and progress you can see, touch, smell, hear.

That being said, Saline Republican, is this a waste of your money? You can use it as you wish.

__________________________________

Yes it has been a waste of money and it has not helped the economy at all.

Why the Stimulus Failed
Fiscal policy cannot exnihilate new demand

BRIAN RIEDL

Conservatives have correctly declared President Obama’s $787 billion “stimulus” a flop. In a January report, White House economists predicted the bill would create (not merely save) 3.3 million jobs. Since then, 2.8 million jobs have been lost, pushing unemployment toward 10 percent.

Yet few have explained correctly why the stimulus failed. By blaming the slow pace of stimulus spending (even though it’s ahead of schedule), many conservatives have accepted the premise that government spending stimulates the economy. Their thinking implies that we should have spent much more by now.

History proves otherwise. In 1939, after a doubling of federal spending failed to relieve the Great Depression, Treasury Secretary Henry Morgenthau said that “we have tried spending money. We are spending more than we have ever spent before and it does not work. . . . After eight years of this administration we have just as much unemployment as when we started . . . and an enormous debt to boot!” Japan made the same mistake in the 1990s (building the largest government debt in the industrial world), and the United States is making it today.

This repeated failure has nothing to do with the pace or type of spending. Rather, the problem is found in the oft-repeated Keynesian myth that deficit spending “injects new dollars into the economy,” thereby increasing demand and spurring economic growth. According to this theory, government spending adds money to the economy, taxes remove money, and the budget deficit represents net new dollars injected. Therefore, it scarcely matters how the dollars are spent. John Maynard Keynes famously asserted that a government program paying people to dig and then refill ditches would provide new income for those workers to spend and circulate through the economy, creating even more jobs and income. Today, lawmakers cling to estimates by Mark Zandi of Economy.com that on average, $1 in new deficit spending expands the economy by roughly $1.50.

If that were true, the record $1.6 trillion in deficit spending over the past fiscal year would have already overheated the economy. Yet despite this spending, which is equal to fully 9 percent of GDP, the economy is expected to shrink by at least 3 percent this fiscal year. If the spending constitutes an injection of “new money” into the economy, we may conclude that, without it, the economy would contract 12 percent — hardly a plausible claim.

If $1.6 trillion in deficit spending failed to slow the economy’s slide, there’s no reason to believe that adding $185 billion — the 2009 portion of the stimulus bill — will suddenly do the trick. But if budget deficits of nearly $2 trillion are insufficient stimulus, how much would be enough? $3 trillion? $4 trillion?

This is no longer a theoretical exercise. The idea that increased deficit spending can cure recessions has been tested, and it has failed. If growing the economy were as simple as expanding government spending and deficits, then Italy, France, and Germany would be the global economic kings. And there would be no reason to stop at $787 billion: Congress could guarantee unlimited prosperity by endlessly borrowing and spending trillions of dollars.

The simple reason government spending fails to end recessions is that Congress does not have a vault of money waiting to be distributed. Every dollar Congress “injects” into the economy must first be taxed or borrowed out of the economy. No new income, and therefore no new demand, is created. They are merely redistributed from one group of people to another. Congress cannot create new purchasing power out of thin air.

This is intuitively clear in the case of funding new spending with new taxes. Yet funding new spending with new borrowing is also pure redistribution, since the investors who lend Washington the money will have that much less to invest in the economy. The fact that borrowed funds (unlike taxes) must later be repaid by the government makes them no less of a zero-sum transfer today.

Even during recessions — when total production falls, leaving people with less income to spend — Congress cannot create new demand and income. Any government spending that increases production at factories and puts unemployed individuals to work will be financed by removing funds (and thus idling resources) elsewhere in the economy. This is true whether the unemployment rate is 5 percent or 50 percent.

For example, many lawmakers claim that every $1 billion in highway stimulus will create 47,576 new construction jobs. But Congress must first borrow that $1 billion out of the private economy, which will then lose a roughly equivalent number of jobs. As transportation-policy expert Ronald Utt has explained, “the only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven.” Removing water from one end of a swimming pool and dumping it in the other end will not raise the overall water level. Similarly, moving dollars from one part of the economy to the other will not expand the economy. Not even in the short run.

Consider a simpler example. Under normal circumstances, a family might put its $1,000 savings in a certificate of deposit at the local bank. The bank would then lend that $1,000 to the local hardware store. This would have the effect of recycling that spending around the town, supporting local jobs. Now suppose that, induced by an offer of higher interest rates, the family instead buys a $1,000 government bond that funds the stimulus bill. Washington spends that $1,000 in a different town, creating jobs there instead. The stimulus bill has changed only the location of the spending.

The mistaken view of fiscal stimulus persists because we can easily see the people put to work with government funds. We don’t see the jobs that would have been created elsewhere in the economy with those same dollars had they not been lent to Washington.

In his 1848 essay “What Is Seen and What Is Not Seen,” French economist Frédéric Bastiat termed this the “broken window” fallacy, in reference to a local myth that breaking windows would stimulate the economy by creating window-repair jobs. Today, the broken-window fallacy explains why thousands of new stimulus jobs are not improving the total employment picture.

Keynesian economists counter that redistribution can increase demand if the money is transferred from savers to spenders. Yet this “idle savings” theory assumes that savings fall out of the economy, which clearly is not the case. Nearly all individuals and businesses invest their savings or put it in banks (which in turn invest it or lend it out) — so the money is still being spent somewhere in the economy. Even in this recession, with tightened lending standards, banks are performing their traditional role of intermediating between those who have savings and those who need to borrow. They are not building extensive basement vaults to hoard cash.

Since the financial system transfers savings into investment spending, the only savings that drop out of the economy are those dollars literally hoarded in mattresses and safes — and there is no evidence that this is occurring en masse. And even if individuals, businesses, and banks did distrust the financial system enough to hoard their dollars, why would they suddenly lend them to the government to finance a stimulus bill?

Once the idle-savings theory collapses, so does all the intellectual support for government spending as stimulus. If there are no idle savings to acquire, then the government is merely borrowing purchasing power from one part of the economy and moving it into another part of the economy. Washington becomes nothing more than a pricey middleman, redistributing existing demand.

Even foreign borrowing is no free lunch. Before China can lend us dollars, it must acquire them from us. This requires either attracting American investment or raising the Chinese trade surplus (and the American trade deficit). The balance of payments between America and other nations must eventually net out to zero, which means government spending funded from foreign borrowing is zero-sum.

I’ve purposely ignored the Federal Reserve, which actually can inject cash into the economy, but not in a way that constitutes stimulus. Congress can deficit-spend; Treasury can finance the deficit spending by issuing bonds; and the Federal Reserve can buy those bonds by printing money. Any economic boost is then due to the Federal Reserve’s actions, not the deficit spending — and of course the Federal Reserve will have to raise interest rates, slowing the economy again, to bring the resulting inflation under control.

If government spending doesn’t cause economic growth, what does? Growth happens when more goods and services are produced, and the only true source of this is an expanding labor force combined with high productivity. High productivity in turn requires educated and motivated workers, advanced technology, adequate infrastructure, physical capital such as factories and tools, and the rule of law.

Government spending could boost long-run productivity through investments in education and infrastructure — but only if politicians could target those investments better than the private sector would. And it turns out that politicians cannot outsmart the marketplace. Mountains of academic studies show that government spending generally reduces long-term productivity.

Furthermore, most government programs that could increase productivity don’t work fast enough to counteract a recession. Education spending cannot raise productivity until its student beneficiaries graduate and enter the work force. It can take more than a decade to build new highways and bridges.

The only policy proven to increase productivity in the short term is to lower tax rates and reduce regulation. Businesses can grow only through consistent investment and an expanding, skilled workforce. Cutting marginal tax rates promotes these conditions, by creating incentives to work, save, and invest.

It’s happened before. In 1981, President Reagan inherited an economy stagnating under the weight of 70 percent marginal income-tax rates. Under Reagan, the top rate fell to 28 percent, and the subsequent surge in investment and labor supply created the strongest 25-year economic boom in American history.

Such tax-rate reductions are superior to tax rebates designed to “put money in people’s pockets.” Rebates — like government spending — simply redistribute existing dollars. They don’t increase productivity because they don’t change incentives: No one has to work, save, or invest more to get a tax rebate. The 2001 and 2008 rebates failed because Congress borrowed money from investors and foreigners and redistributed it to families. Not surprisingly, any new personal-consumption spending was matched by corresponding declines in investment spending and net exports, and the economy remained stagnant.

If conservatives wish to provide economic leadership, they must get this argument right. The stimulus is not failing because it is too small or because too much of it is being saved. It’s failing because Congress can only redistribute existing demand, not create new demand. This recession will eventually end. The more serious, long-term danger is that President Obama’s Europeanization of the economy will bring the same slow growth, stagnant wages, job losses, high taxes, and lack of competitiveness that have plagued Western Europe, leaving the United States at an ever-growing disadvantage with Asian countries not so afflicted.

To prevent this, conservatives and free marketeers will need to promote policies that support long-term prosperity. The first step will be articulating why big government does not bring economic growth.

Mr. Riedl is a research fellow at the Heritage Foundation.

On the Arkansas Times Blog on July 7, 2011, the person using the username “PresRevRob” noted:

The stimulus spending has not balooned the deficit nearly as much as the Republican forays into foreign wars. To say otherwise would be bordering on the intellectually dishonest.

I will be responding to the issue of the Obama stimulus in my future articles on that specically. Today I will discuss the foreign wars that “PresRevRob” has brought up.

My son Hunter Hatcher fought in Iraq in 2008 and will be in Afghanistan in 2012. My nephew Jeremy Parks just got back from being in Afghanistan for a year. While they were there I wrote them letters almost every day. This subject concerning these wars has been on my mind a lot in the last few years.

I often argue with liberals but I hope I am brave enough to admit when I am wrong. I remember when President Bush decided not to send troops in on the ground in 1991 to take over the country, I knew that the problem with Sadam Hussein in Iraq may rise again and it did. At that point I thought it was right to send ground troops in after 9/11. However, looking back that was not a prudent move.

After reading this article below my eyes were opened even more.

Is the War in Afghanistan Winnable?

by Christopher Preble 

This article appeared on The Economist Online on May 21, 2010.

The appropriate question is not whether the war is winnable. If we define victory narrowly, if we are willing to apply the resources necessary to have a reasonable chance of success, and if we have capable and credible partners, then of course the war is winnable. Any war is winnable under these conditions.

None of these conditions exist in Afghanistan, however. Our mission is too broadly construed. Our resources are constrained. The patience of the American people has worn thin. And our Afghan partners are unreliable and unpopular with their own people.

Given this, the better question is whether the resources that we have already ploughed into Afghanistan, and those that would be required in the medium to long term, could be better spent elsewhere. They most certainly could be.

More important still is the question of whether the mission is essential to American national security interests — a necessary component of a broader strategy to degrade al-Qaeda’s capacity for carrying out another terrorist attack in America. Or has it become an interest in itself? (That is, we must win the war because it is the war we are in.)

Judging from most of the contemporary commentary, it has become the latter. This explains why our war aims have expanded to the point where they are serving ends unrelated to our core security interests.

The current strategy in Afghanistan is flawed. Population centric counterinsurgency (COIN) amounts to large-scale social engineering. The costs in blood and treasure that we would have to incur to accomplish this mission — in addition to what we have already paid — are not outweighed by the benefits, even if we accept the most optimistic estimates as to the likelihood of success.

It is also unnecessary. We do not need a long-term, large-scale presence to disrupt al-Qaeda. Indeed, that limited aim has largely been achieved. The physical safe haven that al-Qaeda once enjoyed in Afghanistan has been disrupted, but it could be recreated in dozens of other ungoverned spaces around the world — from Pakistan to Yemen to Somalia. The claim that Afghanistan is uniquely suited to hosting would-be terrorists does not withstand close scrutiny.

Nor does fighting terrorism require over 100,000 foreign troops building roads and bridges, digging wells and crafting legal codes. Indeed, our efforts to convince, cajole or compel our ungrateful clients to take ownership of their problems might do more harm than good. Building capacity without destroying the host nation’s will to act has always proved difficult. This fact surely annoys most Americans, who have grown tired of fighting other people’s wars and building other people’s countries. It is little surprise, then, that a war that once enjoyed overwhelming public support has lost its lustre. Polls show that a majority of Americans would like to see the mission drawn to a close. The war is even less popular within the European countries that are contributing troops to the effort.

You go to war with the electorate you have, not the electorate you wished you had. But while the public’s waning appetite for the war in Afghanistan poses a problem for our current strategy, Hamid Karzai poses a greater one. Advocates of COIN explain ad nauseam that the success of these missions depends upon a reliable local partner, something that Mr Karzai is not. Efforts to build support around his government are likely to fail. An individual who lacks legitimacy in the eyes of his people does not gain from the perception that he is a foreign puppet. Mr Karzai is caught in a Catch-22. His ham-fisted efforts to distance himself from the Obama administration have eroded support for him in America without boosting his standing in Afghanistan.

America and its allies must narrow their focus in Afghanistan. Rather than asking if the war is winnable, we should ask instead if the war is worth winning. And we should look for alternative approaches that do not require us to transform what is a deeply divided, poverty stricken, tribal-based society into a self-sufficient, cohesive and stable electoral democracy.

If we start from the proposition that victory is all that matters, we are setting ourselves up for ruin. We can expect an endless series of calls to plough still more resources — more troops, more civilian experts and more money, much more money — into Afghanistan. Such demands demonstrate a profound misunderstanding of the public’s tolerance for an open-ended mission with ill-defined goals.

More importantly, a disdain for a focused strategy that balances ends, ways and means betrays an inability to think strategically about the range of challenges facing America today. After having already spent more than eight and a half years in Afghanistan, pursuing a win-at-all-costs strategy only weakens our ability to deal with other security challenges elsewhere in the world.

Tim Griffin spoke in Central Arkansas recently at a townhall meeting and mentioned that a couple of million of stimulus money went to build the walking bridge in Little Rock that will be opening this summer. Then he went on to show how it was silly for our government to try to stimulate the economy with our national credit card. I was reminded on that when I read these two articles below:

The Arkansas Times Blog reported today:

The bikers/walkers/runners are humming about the dedication of the Two Rivers Bridge across the Little Maumelle River. It’s set for 11:30 a.m. Friday. The Transportation secretary, Ray LaHood, is to be in attendance.

Enthusiasts want to turn out a crowd to show support for future bike/hike projects in the area.

Steve Chapman  rightly noted in his article “Stimulus to Nowhere” noted:

Mired in excruciating negotiations over the budget and the debt ceiling, President Barack Obama might reflect that things didn’t have to turn out this way. The impasse grows mainly out of one major decision he made early on: pushing through a giant stimulus.

When he took office in January 2009, this was his first priority. The following month, Obama signed the American Recovery and Reinvestment Act, with a price tag eventually put at $862 billion.

It was, he said at the time, the most sweeping economic recovery package in our history,” and would “create or save three and a half million jobs over the next two years.”

The president was right about the first claim. As a share of gross domestic output, it was the largest fiscal stimulus program ever tried in this country. But the second claim doesn’t stand up so well. Today, total nonfarm employment is down by more than a million jobs.

The package had three main components: tax cuts, aid to state governments and spending on infrastructure projects. Tax cuts would induce consumers to buy stuff. State aid would prop up spending by keeping government workers employed. Infrastructure outlay would generate hiring to build roads, bridges and other public works.

The idea behind channeling money to state governments is that it would reduce the paring of government payrolls, thus preserving the spending power of public employees. But the plan went awry, according to a paper by Dartmouth College economists James Feyrer and Bruce Sacerdote published by the National Bureau of Economic Research.

“Transfers to the states to support education and law enforcement appear to have little effect,” they concluded. Most likely, they said, states used the money to avoid raising taxes or borrowing money.

That’s right: The federal government took out loans that it will have to cover with future tax increases … so states don’t have to. It’s like paying your Visa bill with your MasterCard.

The public works component could have been called public non-works. It sounds easy for Washington to pay contractors to embark on “shovel-ready projects” that needed only money to get started. The administration somehow forgot that even when the need is urgent, the government moves at the speed of a glacier.

John Cogan and John Taylor, affiliated with Stanford University and the Hoover Institution, reported earlier this year that out of that $862 billion, a microscopic $4 billion has been used to finance infrastructure. Even Obama has been chagrined.

“There’s no such thing as shovel-ready projects,” he complained last year.

Even if jobs were somehow created or saved by this ambitious effort, they came at a prohibitive price. Feyrer and Sacerdote say the costs may have been as high as $400,000 perjob.

Based on all this evidence, we don’t really know whether the federal government can use fiscal policy to engineer a recovery. We do know it can go broke trying.

Senator Mark Pryor wants our ideas on how to cut federal spending. Take a look at this video clip below:

Senator Pryor has asked us to send our ideas to him at cutspending@pryor.senate.gov and I have done so in the past and will continue to do so in the future.

On May 11, 2011,  I emailed to this above address and I got this email back from Senator Pryor’s office:

Please note, this is not a monitored email account. Due to the sheer volume of correspondence I receive, I ask that constituents please contact me via my website with any responses or additional concerns. If you would like a specific reply to your message, please visit http://pryor.senate.gov/contact. This system ensures that I will continue to keep Arkansas First by allowing me to better organize the thousands of emails I get from Arkansans each week and ensuring that I have all the information I need to respond to your particular communication in timely manner.  I appreciate you writing. I always welcome your input and suggestions. Please do not hesitate to contact me on any issue of concern to you in the future.

Here are a few more I just emailed to him myself:

• Eliminate direct corporate welfare payments by:

1. Closing down the Minority Business Development Agency (2004 spending: $22 million, discretionary);26
2. Disqualifying high-income farmers and agribusinesses from farm subsidies ($8,000 million, mandatory);27
3. Eliminating the Small Business Administration ($3,978 million, discretionary);
4. Terminating the Overseas Private Investment Corporation (-$157 million, discretionary);
5. Shutting down the Trade and Development Agency ($62 million, discretionary);
6. Eliminating the Market Access Program ($119 million, mandatory);
7. Closing down the Export−Import Bank
   (-$1,582 million, mandatory);
8. Repealing the Davis−Bacon and Service Contract Acts; and
9. Terminating the Essential Air Service Program ($57 million, discretionary).

This is how bad it is getting:

Popular Programs Are Growing Rapidly

• Lawmakers have had difficulty setting budget priorities in recent years. In addition to funding two wars and the largest anti-poverty budgets in American history, they have increased spending on popular programs like education, veterans benefits, and Medicare at unsustainable rates.

HALT:HaltingArkansasLiberalswithTruth.com

Excerpts from an interview with Hillsdale College President Larry Arnn on May 22, 2006 in which Milton explains the dynamics involved when parents are empowered to select the best educational option for their children.

I read an excellent article called “School Choice in Sweden: An Interview with Thomas Idergard of Timbro,” (March 8, 2010) by Dan Lips and I wanted to share some of his answers with you below: