Economic Update: March 2017 – Big Government Slows Growth

In 1930, Pluto was declared the ninth planet. Apparently, and I’ve been informed by my 11 year old daughter and 8 year old son, that in 2007, Pluto was demoted to “dwarf planet” status by astronomers after considering new evidence.  So I guess, we are now back to only eight planets?

Interestingly enough, in the 1930s, the ideas of John Maynard Keynes came of age. In spite of a massive amount of evidence that these ideas don’t work, unlike astronomers, economists won’t demote Keynes’ theories to the dustbin of history. I don’t know about you, but for me I am still a little upset about Pluto’s demotion, yet I’m not surprised at all about the lack of action around Keynes’s theories and here is why…

Whether Pluto is a planet, or not, doesn’t impact politicians or their constituents; if it did, Pluto might still be categorized as a planet.  With Keynes, he thought a free market economy should be managed and needed to be managed.  And in the 1930s, his ideas flourished when the US was in the Great Depression, as Keynes believed that a lack of consumer demand was the culprit to economic problems.  His viewpoint was that government should spend to boost jobs and economic activity and to this day, in the name of Keynes, economists and politicians support stimulus spending, unemployment benefits, minimum wages, and the re-distribution of income.  And because of it, in the name of helping the overall economy, politicians and bureaucrats get to increase the size of their budgets and take credit for benefiting constituents; and often, they do it in the name of Keynesian economic theory.

Keynes’s theories, as mentioned earlier, have been around for over 80 years. Countries all over the world have tried them and government budgets have increased dramatically. This spending encompasses food stamps, welfare, unemployment benefits, Social Security, Medicare, Medicaid, ethanol, solar, wind, and electric vehicle subsidies. State and local governments have boosted the minimum wage and created special subsidies and income support for citizens. Other countries have single-payer healthcare systems and even bigger budgets relative to GDP than that of the United States, but there is simply no economic nirvana anywhere. After 80 years of growth in government, and little economic growth to show for it, doesn’t anyone think we ought to stop and question the underlying assumptions that supports these Keynesian policies?

Since the current expansion started, U.S. real GDP has expanded at just a 2.1% annualized rate and at the same time, government spending, tax rates and regulation have increased. These government burdens reduce entrepreneurial activity, jobs, income growth and push companies out of the U.S. For me, I believe that many ignore this correlation between bigger government and slower growth and they instead find endless non-government excuses for slow growth.  As for the list of excuses, some blame demographics and some blame weak investments by companies. Other explanations include income inequality, foreign trade, the residual effects of the financial crisis, or government debt levels (which result from low tax receipts.) And all of these explanations shift the blame to the private sector for slow growth and in support of Keynesian’s big-government policy.

Unfortunately, we’ve got to recognize that government is funded by taxing incomes and profits that are generated from business activities and/or borrowing the wealth generated by business activity. It’s true that government can help create a positive environment for business by enforcing the rule of law and contracts, but the U.S. long ago surpassed the pro-growth level of spending.

My Point:  Government doesn’t create wealth; the private sector does. No matter what Keynesian theories say this is the “truth.”  Unfortunately, politicians and bureaucrats don’t find the “truth” very appealing and I don’t find big government appealing as it slows growth.

 

Stephen C. Peters
Founder & CEO
VisionQuest Wealth Management
VisionQuest Capital