Obama’s American Jobs Act Spends More for Economic Recovery, Perpetuates Keynesian Myth

President Obama delivered his jobs speech this evening, which focused on job creation via tax breaks for small businesses, cuts in payroll taxes, and more infrastructure projects.  This is the usual rhetoric coming out of Washington and many will liken it simply to a last-ditch effort of the White House to improve polling numbers going into the campaign season.  But we should not focus on such drivel.  Rather what should be noted is that only one month after averting a U.S. sovereign default and seeing our credit rating downgraded for the first time in nearly a century, stimulus spending in the name of economic recovery has not left Washington, as it is at the heart of this legislation.  President Obama stated:

The purpose of the American Jobs Act is simple: to put more people back to work and more money in the pockets of those who are working. It will create more jobs for construction workers, more jobs for teachers, more jobs for veterans, and more jobs for the long-term unemployed. It will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and hire, there will be customers for their products and services. You should pass this jobs plan right away.

via Google Images

Wow!  I am so glad we learned our lesson about unrestrained spending and fiscal prudence.  Oh wait, President Obama also stated that every piece of this legislation is paid for.  But this depends not on dollars we currently have saved in some bunker beneath the White House or the U.S. Treasury.  The money that will pay for the American Jobs Act is that which has yet to be saved.  Recall the Budget Control Act passed last month to avert a default on U.S. credit.  It called for nearly $1 trillion in immediate cuts, but the term “immediately” in Washington-speak actually means spread out over the next ten years.  So we are to pay for this legislation, much of it with immediate costs, with spending cuts that will be enacted under a different Congress and Executive? Really?  But wait, there is also the additional $1.5 trillion in spending cuts to be determined by our beloved “Super Congress” before the end of the year.  But the likelihood that such cuts will see the balance sheet within the Obama administration, or even the next, is not likely.

Here are some more reasons why Congress should pass yet another Keynesian policy, despite the utter failure of its predecessors.

  • Pass this jobs bill, and starting tomorrow, small businesses will get a tax cut if they hire new workers or raise workers’ wages.
  • Pass this jobs bill, and all small business owners will also see their payroll taxes cut in half next year.
  • Pass this jobs bill, and thousands of teachers in every state will go back to work.
  • Pass this jobs bill, and companies will get extra tax credits if they hire America’s veterans.
  • Pass this jobs bill, and companies will get a $4,000 tax credit if they hire anyone who has spent more than six months looking for a job.
  • Pass this jobs bill, and the typical working family will get a fifteen hundred dollar tax cut next year.

The bottom line is this.  Our government continues to spend and propose additional spending in the name of economic recovery with little results and an empty wallet to boot.  The results at this point are certain.  Any recovery proposed by Washington policy hounds or the President will fail because two things must happen for a recovery: (1) decreased government spending, and (2) increased spending in the private sector to fuel consumption.  Yet, our government is stuck in the ideological misnomer of Keynesian stimulus spending.  Consequently, they seek to accomplish private sector growth by crowding our private sector markets.  It is an economical contradiction and illuminates the lunacy of Washington politics.

The best policy that could come out of Washington at this point is no policy at all.  But that is not the take of our beloved President.  He made his ideological stance on the government’s role in the free market quite clear.  “As I’ve argued since I ran for this office, we have to look beyond the immediate crisis and start building an economy that lasts into the future – an economy that creates good, middle-class jobs that pay well and offer security.”  By “we” he does not mean the American people, but Congress and the Executive.  Despite the rhetoric of Washington politics looking to and “representing” the people, their record demonstrates actions often to the contrary.  So one must conclude from this statement that the intent is not to let the markets recover on their own, but to continue crowding out any chance at a recovery now and in the near to mid future.  The only substantive impact of increased spending now is increased taxes later, but without an economy to raise wages enough to offset such tax increases we will all see a real decline in living standards.  Welcome to the new America!

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“Super Congress” Destroys Constitutional Government

For me and many other Americans, the most Constitutionally flagrant aspect of the Budget Control Act (BCA) rests in the creation of a “Super Congress.”  Forget the fact that the BCA fails to cut spending while it ignores the basic underlying problem of fiscal insolvency.  The creation of a “Super Congress”  to find the additional $1.5 trillion in cuts isolates most of Congress from the ability to legislate budgetary policy and to set tax rates.  This is a gross violation of the Constitution.

There is much speculation throughout the media that this commission will implement stringent tax increases to pay for future budget shortfalls, foreign wars, and growing entitlements. The Huffington Post reported nearly two weeks ago that “A Super Congress would be less accountable than the system that exists today.”  Some see the “Super Congress” as a monumental win for the elite establishment.

  “The establishment of a “Super Congress” will completely demolish the credibility and the authority of the system of elected representatives. It represents another final nail in the coffin of the American Republic and its replacement with an executive dictatorship run by the political elite.” 

The danger lies in the committee’s structure, which affords it a degree of power unseen in American government.  The 13-member committee will be composed of six members from the House and six members from the Senate to be picked by top Congressional leadership, with the 13th tie-breaking vote belonging to the President.  In addition, the committee holds the authority to fast-track legislation through both chambers of Congress, allowing legislators only an up or down vote.  The implication becomes clear when one understands that any legislation coming from the “Super Congress” is tied directly to subsequent debt-ceiling increases.  Considering recent events and the spending addiction that characterizes Washington, the possibilities of Congress failing to raise the debt ceiling in the future are not worth mentioning.  In short, members of the House and Senate will likely be forced to accept anything coming out the group without the ability to propose amendments.  Congressman Ron Paul highlights the group’s effects on Congressional legitimacy.

“Perhaps the most disturbing aspect of this deal is the “Super Congress” provision. This is nothing more than a way to disenfranchise the majority of Congress by denying them the chance for meaningful participation in the crucial areas of entitlement and tax reform. It cedes power to draft legislation to a special commission, hand-picked by the House and Senate leadership. The legislation produced by this commission will be fast-tracked, and Members will not have the opportunity to offer amendments. Approval of the recommendations of the “Super Congress” is tied to yet another debt ceiling increase. This guarantees that Members will face tremendous pressure to vote for whatever comes out of this commission– even if it includes tax increases. This provision is an excellent way to keep spending decisions out of the reach of members who are not on board with the leadership’s agenda.” 

The BCA highlights an increasingly defined pattern in American government whereby Washington grows in power from its own neglect of prudent governance.  Over recent decades, Washington has gained an unprecedented amount of control over the economy.  Now it uses the financial crisis and subsequent debt crisis – which resulted from misaligned policies originating from Washington – to grant itself unprecedented powers that not only trample Constitutional government, but isolate many of its own members.  This amounts to nothing less than a death spiral of representative government.  I urge you to inform yourself and to stay informed of these matters, for despite the meaningless rhetoric of “our children’s future” emanating from Washington, such legislation effectively strips us from any power to control our own financial destinies.

Below is a video from Fox News.  While I normally stay away from Fox (I feel they are too much part of the mainstream media establishment), this video presents the meat of the issue well.

What is it About Economics…The Debt Deal Examined

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Government spending is out of control.  The national debt is almost equal to GDP (97%).  Unemployment is at 9.6% officially, almost 20% unofficially.  The debt ceiling game in Washington leaves little room for comfort among middle class Americans and investors.  A U.S. credit downgrade is imminent.  The future is not bright.  So what is it about economics that leaves so many people (on many occasions myself included) confused and bewildered into a state of apathy?  After all, are we not taught the fundamental aspects of economics, namely that competition preserves ingenuity, the law of demand determines fair (market) prices, and that a market free of government encourages investment for future growth because the market is the amalgamation of millions of choices – for America approximately 311 million.  So long as these phenomena are allowed to occur unimpeded, the path toward prosperity continues.  As more jobs are created and more products enter new markets, economic growth occurs both vertically (established markets grow) and horizontally (new markets emerge). The net result is a forward-moving economy and a growing people. So how is it the average American has ended up in the ditch, given only the choice to take the hand to his Left or Right?  The Cato Institute’s Daniel Mitchell discusses just how Keynesian economics has contributed to the growing bewilderment surrounding economic analysis, namely the misdirected attention given to GDP as a measure of the health of an economy.  He engages in useful analogy, using the finances of an individual home in place of an entire economy.  In economics, models are often used to simplify economic variables, rendering understanding of the fundamental more prevalent.  Mitchell has done this beautifully.  He demonstrates two key points contrary to the Keynesian solution.  

  1. Government expenditure crowds out the private sector.  That is, as government spends more, less is left for private consumption and investment, the driving forces for economic growth.
  2. As taxes increase, spending (as measured by GDP) stays the same, while less expenditures are free for things that improve our lives because more of our total income (fixed in the analogy) is redistributed as a tax expenditure.

Mitchell’s message is this: “government is capable of redistributing how national income is spent, but it isn’t a vehicle for increasing national income.”  The wealth of a nation is not determined, nor can it be significantly increased, by government spending (as shown in GDP).  Rather, wealth is determined by gross national income (GNI).  While GDP reflects higher levels of spending, an actual increase in GDP is only a product of increased national income. This point is particularly important given the debt deal just passed by the House.  It incorporates “enforcement mechanisms” built into what I would call a debt deal that pays only lip service to the people.  Besides the fact that the deal only trims a “projected” $1 trillion from the national debt over the next ten years (this is paltry and means very little), President Obama rejected any proposals that would enact cuts from entitlements after 2013.  Here is a passage from the White House fact sheet:

“In Securing this Bipartisan Deal, the President Rejected Proposals that Would Have Placed the Sole Burden of Deficit Reduction on Low-Income or Middle-Class Families: The President stood firmly against proposals that would have placed the sole burden of deficit reduction on lower-income and middle-class families. This includes not only proposals in the House Republican Budget that would have undermined the core commitments of Medicare to our seniors and forced tens of millions of low-income Americans to go without health insurance, but also enforcement mechanisms that would have forced automatic cuts to low-income programs. The enforcement mechanism in the deal exempts Social Security, Medicaid, Medicare benefits, unemployment insurance, programs for low-income families, and civilian and military retirement.”

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Although tax-reform is on the agenda upon the expiration of the Bush tax cuts at the end of 2012, which according to the President would require higher earners to help pay for deficit reductions, the reality of exempting entitlements entirely will necessitate either higher taxes for everyone or continued growth in the debt.  Moreover, although the debt deal reduces the rate of spending, discretionary spending still projects upward over the next ten years.  Consequently, the debt deal will most likely result in higher taxation and less disposable income for the people – an additional and significant detractor from economic recovery.  In short, it is my contention that the deal does nothing for the long-term financial solvency of the U.S. government and will result in tax increases and spending allocations that will surely out pace our weak recovery, leaving less for private consumption and investment. Despite often conflicting ideologies regarding issues such as entitlement spending, foreign wars, and tax reform, our dual-party system hardly represents differing views when it comes to economics, namely spending.  That is, they both prescribe to a school of economic thought that has led America to where we now kneel.  Whether you have heard of Keynesian economics or not, you have felt its impact via stagnant wages, lost jobs, and growing government.  The new debt deal only reinforces this. While typically associated with the Left, Keynesian economics, whether in the name of stimulus, tax reform, or entitlements, promotes government expenditure at the expense of the private sector, stifling growth and rendering competition, demand, and the free-market mute.  These trends have grown beneath both parties in recent decades.  Consequently, more spending for entitlements and foreign wars is rendering the welfare-warfare state an increasingly stark reality.

My Related Posts:

Congressional Policy Leads to Inefficient Taxation

The following is a short article on tax fraud and abuse from an affiliate site of the Cato Institute.  Its message is simple, yet fundamental in recognizing the inefficiencies of government outgrowth.

Congressional Candy (via examiner.com)

IRS Handing Out Free Candy

“While it is easy to castigate the IRS, it’s important to remember that the monstrous tax code it administers is a creation of Congress. Our absurdly complex and complicated tax code is a direct result of policymakers engaging in social engineering and economic micromanagement. While there are murmurs that Congress might take up tax reform this year, policymakers need to understand that it is the federal government’s excessive involvement in our personal and economic affairs that fuels this tax code insanity.”

Click for full article→

Property Taxes Change Meaning of Home Ownership

Mr. Shedlock sheds a new light on home “ownership.”  As shortfalls weigh on local and state budgets, increases in property taxes are a favored way to make up dwindling revenues.  Unfortunately for homeowners, such taxes act as perpetual liabilities.  As the economy remains on thin ice, fewer are able and willing to claim or maintain the title “Homeowner.”  Changes in how Americans view the concept of ownership are redefining the American middle class and the fundamental economic relationships of all Americans.  Take a look!

Perpetual Liabilities: An endless note on your house you can never pay off (by Mike Shedlock)

Image from Monty Pelerin's World

Imagine the perpetual loan, a loan that no matter what you do, you can never pay off. To help conceptualize the idea, think of it as a perpetual interest-only loan in which you are forbidden to completely pay off principal.

As preposterous as that deal may sound, it is highly likely you are in one.

If you own a house, you are in exactly that deal, except it conveniently not called interest. Instead it’s called a property tax.

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