Monday, February 6, 2012

The KISS Method ... Government Spending is the Elephant in the Room

Let's adopt the KISS (keep it simple, stupid) approach to government malfeasance today.

We'll begin with the conclusion. Unnecessary government spending and regulation is harmful to our economy.

Our nation's most important problem needing a solution isn't deficits or public debt levels. It's government spending run amok.

Simply put, government spending requires that money be taken from the private sector. As a result, MOM becomes OPM as the new government money no longer belongs to the taxpayers from whom it was taken.

When government spends, it simply substitutes bureaucratic choice for individual choice. OPM versus MOM and all that entails.

A brief discussion of taxation and compensation will also help us to see that it's an absolute necessity to rein in today's out-of-control government spending. So let's begin.

Assume that you and I belong to a two person civil society. We're both for one and one for both. In other words, we're each doing our own thing while watching each other's back at the same time.

If for some reason I'm employed and you're not, I must give to you part of what I earn to keep you afloat. And that's only fair.

Accordingly, a portion of my earnings, aka taxes, will be redistributed from me to you. Although I'll end up with less of what I earned, you'll receive something while having done nothing to earn it. But at least you're still floating, and that makes us both happy.

Even though we're happy, there are side effects to our redistribution program.

Lesson 1 ... The more we tax someone, the less that person will be inclined to work harder and longer in the future.

Lesson 2 ... The more we pay someone for doing nothing, the more inclined that person will be to keep doing nothing.

Lesson 3 ... The less total work performed, the less wealth is created.

Lesson 4 ... The less wealth created, the weaker the economy will be.

Lesson 5 ... The weaker the economy, the less work there is to do. And so on.

But you say that you'll be happy to work for fair pay. Now we only need to agree on what's fair pay.

If you won't work for less than $50,000 per year, since that's what you used to be paid when you were employed, but the global market for what you're capable of doing now pays only $25,000, you'll still require my support to keep you afloat. Together we'll leave $25,000 on the table.

Lesson 6 ... The higher the compensation required to achieve "fair pay," the less that person's services will be in demand.

Lesson 7 ... The higher our perception of what constitutes fair pay, the less inclined we'll be to work for less than that amount, especially if we're paid not to work.

Now let's consider government spending. In our two person society, the part that I pay you from what I earn is government spending.

That will be harmful to future economic growth, since I'll be less incentivized to work as diligently in the future. And you may be inclined not to work, thus requiring not only my further support to keep you afloat but resulting in fewer total earnings for our two person society.

$5 Trillion and Change describes the out-of-control U.S. government spending these past few years:

"CBO (Congressional Budget Office, a government agency) reports that annual spending over the Obama era has climbed to a projected $3.6 trillion this fiscal year from $2.98 trillion in fiscal 2008, or more than 20%. The government spending burden has averaged 24% of GDP (gross domestic product), up from an average of about 20%. This doesn't include the $2 trillion tab for ObamaCare.

All of this has increased the federal debt by about $5 trillion in a mere four years. Thanks to higher revenues, the federal deficit will decline to $1.08 trillion in 2012, or 7% of GDP. But that is still the highest deficit since 1946—except for the previous three years. In other words, the four years of Obama's Presidency will mark the four highest years in spending and deficits as a share of the economy since Harry Truman sat in the Oval Office.

And don't forget the national debt held by the public—the kind we have to pay back. On President Obama's watch, CBO says public debt will climb this year to 72.5% of the economy from 40.3% in 2008. This isn't as high as Italy or Greece, but it's rising fast toward the 90% level that begins to debilitate an economy. . . .

The other part of the fiscal story is that revenues have been in the tank for five years. In 2012 revenues will hit $2.52 trillion down from $2.57 trillion in 2007. Revenues are still only 16.3% of GDP, about two percentage points below the norm. . . .


Now let's return to our KISS discussion of a two person society. The more we "stimulate" the economy by taking my money and giving it to you, the lower our economic growth will be.

In the broader society, if we increase the number of public school teachers, for example, we'll need to raise the money to pay them. In our two person society, that would mean the money to pay the teacher comes from me.

And if we grant social security recipients a raise, either one time or permanent, we must first raise that money as well. Me again.

And if we decide to extend unemployment benefits. You guessed it.

And reducing home mortgage obligations for troubled borrowers. Right again.

And so on.

Government spends OPM. In KISS terms, it merely takes your MOM and spends it, frequently by giving it to someone else to spend. But only after first charging government's commission and handling charge to get it from one person to another, of course.

And the fewer the number of total people that work in the private sector, the less total money society will earn.

In our two person society, if you and I both earned money, we'd have zero government spending. We'd each spend and invest it as we saw fit.

But if necessary we could choose to take some of mine and help you along the way to self sufficiency. You'd be paying your own way at least in part, and that would be a good thing for both of us. And for our future well being as well.

Let's remind ourselves of this KISS truism. The less private sector earnings that remain in the private sector (i.e., with me), the less future investment there will be in the private sector. That means less economic growth, and that won't be a good thing.

The bottom line is this--the more government spends, the less an economy is able to grow.

And the less an economy grows, the less money there will be available for government to spend, unless government spending takes an even bigger piece of the overall economic pie (i.e., you require a greater percentage of my earnings over time to stay afloat). And that growing government as a percentage of the whole is exactly what's been happening in the U.S. these past several years.

To reiterate, government spending has grown as a percentage of the total economy, and as a result, the private sector's piece of the total economic pie has shrunk.

Now let's look at compensation and unemployment.

First, the higher we keep U.S. union wage scales above competitive global pay for comparable work, the higher our unemployment levels will be. And that will result in a negative double whammy as higher unemployment compensation payments combine with the lack of fewer taxes paid by those same unemployed people.

It's another government social security double whammy when we choose to retire early.

And it's the same effect all over again if we choose to receive government cash payments and/or unemployment benefits in lieu of accepting a less desirable job.

Or when we won't work for less than our union demands as "fair pay."

And if we're paid more than comparable private sector work because our public sector union has "won" that pay, the result is more government spending.

The out-of-control government spending hole we're continuing to dig will keep getting deeper until we choose to stop digging. In KISS terms, stopping digging means curtailing government spending. It also means more private sector workers as a percentage of the U.S. population.

That's the only real road to higher tax receipts and reduced government spending. And that's a double whammy of the good kind.

KISS calls for across-the-board tax rate cuts and serious labor-law reforms. That's the only "jobs and growth" program that really makes sense.

Less government spending and a more competitive labor force are essential.

That KISS combination would enable the jobs creating private sector to work its wealth creating magic.

In sum, governments need to get out of the private sector's way, and take the unions along with them.

Thanks. Bob.

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