Thursday, May 24, 2012

Growth Vs. Austerity

Lots of garbage talk is being tossed around these days in the debate over the necessity to choose between growth and austerity in order to deal with our mounting financial ills.

I use the words  garbage talk because the only real debate issue concerns the size of government and its impact on our nation's prosperity. And the creation of millions of needed new jobs as well.

When government grows, the private economy grows less than it otherwise would, if it doesn't actually shrink. That's a bad thing.

But when government "austerity" occurs, the private sector and jobs tend to grow. That's a good thing.

Hence, I chose the term garbage talk, because there's really no choice involved between growth and austerity. In fact, we require government "austerity" programs if we are to maximize economic growth.

In simple terms, government austerity measures would be good for both economic growth and much needed job creation. That in turn would increase taxes paid and reduce the deficit.

On the other hand, private sector austerity such as tax increases imposed by government and new regulations are bad for economic growth and job creation. Thus, private sector austerity imposed by government tax increases tends to decrease total taxes paid and increase the deficit.

Accordingly, and although hardly ever done by the political class, it's imperative that we distinguish between private and public sector spending increases or decreases. Reducing public sector spending is a job creating measure, and reducing private sector spending by increasing taxes and government regulations are job killing measures.

Discussion and Analysis

Accordingly, my take on all this growth versus austerity stuff is straightforward. We need to encourage big amounts of private sector growth and public sector austerity at the same time---and all the time.

Hopefully, the whole world will soon recognize that this is the only genuine path to lasting progress and then this walk and chew gum approach will soon become common practice.

But if not common practice worldwide, let's at least learn to simultaneously walk and chew gum here in the good old U.S.A.

In an excellent editorial, David Malpass: Greece's False Austerity tells it like it is with respect to Greece.  He could have just as easily been talking about us:

"The conflict between growth and austerity is artificial and framed to favor bigger government. Growth comes from economic freedom within a framework of sound money, property rights, and a rule of law that restrains government overreach. Businesses won't invest or hire as much in an environment where governments dominate the economy. Thus, government austerity is absolutely necessary for economic growth in both the short and long run. {To which I say in reply,"Amen."}

Economics has often ignored the critical distinction between austerity for the government and government-imposed austerity on the private sector. In the former, governments which are over-budget sell assets, restrain their hiring, and limit their mission to essentials. That's growth-oriented austerity.

In the private-sector version of austerity, governments impose new taxes and mandates on the private sector while maintaining their own personnel, salaries and pensions. That's the antigrowth version of austerity prevalent in Europe's austerity programs.

Many economic models, including the U.S. Congress's budget scoring system and Keynesian stimulus, ignore national debt levels and disregard whether spending decisions are made by the private sector or the government. This creates the absurd result that an economy in which the government spends and invests increasing amounts—even 100% of GDP—has the same projected growth rate as an economy where the government spends and taxes less.

{Maybe you'll want to reread the above paragraph. On top of using the cash method of accounting and failing to account for long term liabilities like public sector pensions, Social Security and Medicare properly, this one really misleads us about the enormous effects of the difference between private and public sector spending by suggesting that there isn't any.}

Europe's government-imposed austerity programs have required private sectors to pay for debt they didn't incur so that governments can stay large. . . .

The Greek government has been practicing a particularly aggressive form of antigrowth austerity. While the private sector shrank in 2011, Greece's government grew to 49.7% of GDP from 49.6% in 2010. To accomplish this bad outcome, Greece's government increased its value-added tax to 23%—a hidden sales tax so high that no one should be asked to pay it or support it—and created a national property tax that transfers private-sector wealth to the government and through it to foreign creditors.

Meanwhile, Greece's parliament kept full pay, full benefits, its fleet of BMWs, and a full staff. . . .

The reality is that Greece's government is imposing too much austerity on others and not enough on itself. The U.S. is making the same mistake. Yet the big-government branch of economics in France and the U.S. argues that the problem in Greece is too much austerity even though there hasn't been much true austerity on the government. . . .

Beyond the current fight over austerity, growth or the euro, Europe's battle comes down to government-guaranteed wages and benefits versus labor flexibility. Europe's failing governments simply won't allow competition or give up power to achieve competitiveness.

As the U.S. struggles with tax reform, deficit reduction and the year-end fiscal cliff, it will be critical to distinguish between reforms that downsize the government and reforms that downsize the private sector and put the dollar at risk. One approach points to growth, the other to Greece.

Summing Up

Private sector spending creates economic growth and lasting jobs.

Public sector growth impedes private sector spending, thus harming economic growth and lasting jobs.

For evidence, all we have to do is look at the sizes of governments in European countries such as Greece, Portugal, Spain and Italy.

It's plain to see what they've done and continue to do to themselves and their citizens, too.

It's time to stop doing it here.

Thanks. Bob.

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