Why Obama's Big Spending, Big Taxing Regime Will Cripple the U.S. Economy

Obama is ideologically wedded to the cult of big government. This of course requires increased taxation as well as a fundamental belief in the intellectual superiority of those doing the taxing and spending. And as we all know, Obama and his advisors are the smartest clowns in town.

Unlike leftists, conservatives tend to instinctively realise that tax cuts stimulate savings and production. On the other hand, Obama and his merry band of economic vandals who usually go by the moniker of Democrats fully grasp that significant tax cuts weaken their power to bribe and punish and so they oppose cuts with specious economic arguments.

Public understanding of the relationship between taxation and growth is very poor. When this issue comes up I invariably think of a 1993 World Bank Study that concluded that "growth drives savings rather than the other way round". Quite a few years ago Brian Toohey, a leftwing Australian journalist, used the same study, following with another study carried out by two American economists, Christopher Carroll and David Weil, who claimed to have demonstrated that rapid growth in Japan, Hong Kong, South Korea and Singapore had preceded increases in savings.

The dessert was provided by two Australian Treasury economists, Michael Carnahan and Lyn Camilleri, who seemed to find that growth and savings were unrelated. Toohey - like so many admirers of big government - concluded that these studies clearly show that economists who favour tax breaks in order to encourage savings need to prove their case. (One should note that the advocates of big government never think that they need to prove their case. Hence Obama's unseemly and undemocratic rush into Big Government.)

Now it is only right and proper that those who favour tax breaks should explain the beneficial effects of this policy. However, this should not divert our attention from the reality that these studies only demonstrate how far economic thinking has been set back by Keynesianism. Only the confusion between the alleged differences between saving and investment that Keynes unleashed on economic students can account for such bizarre conclusions.

Before any article on savings and investment can really make sense, it must first define what savings and investment really mean. Saving is the process of transforming present goods into future goods. Present goods are consumption goods and future goods are capital goods. When we save, we transfer purchasing power from consumption to the production of capital goods, many of which will then be used to produce more capital goods. (This is why growth is sometimes called forgone consumption.)

Investment in more capital (the material means of production) makes for increased future consumption, i.e., higher living standards. It needs little imagination to realise that taxing savings amounts to taxing future living standards. What needs to be remembered is that when defined in real terms, investment and savings are (a) always equal and (b) saving is clearly the only means by which resources can be directed from consumption to investment. To put it another way: The function of savings is to redirect resources from the production of consumption goods to the production of capital goods.

(Some might object that I am labouring the point. Be that as it may, it is a point of such importance that it needs constant labouring lest we get more journalists echoing these fallacies.)

All of this would be painfully self-evident in a barter economy but, as the classical economists so aptly put it, "money is a veil" that conceals fundamental economic relations, the nature of saving obviously being one. This is a small price to pay for enjoying the benefits of 'monetary exchange'. Nevertheless, economists are supposed to be able to see beyond the veil; that so many cannot is a sad reflection on much of what is taught in our economics faculties.

This brings us to the egregious fallacy that growth can precede saving, which in turn calls for a definition of growth. Growth is an increase in a country's capital structure, its productive capacity. By our own definition of saving and investment, the two cannot deviate because by definition they are identical. Nevertheless, the existence of money can and does create the illusion that real savings can exceed investment. However, this is old hat in economics. This problem was brilliantly laid out by Malthus in an 1811 review of Ricardo's first pamphlet.

Whenever, in the actual state of things, a fresh issue of notes comes into the hands of those who mean to employ them in the prosecution and extension of profitable business, a difference in the distribution of the circulating medium takes place, similar in kind to that which has been last supposed; and produces similar, though of course, comparatively inconsiderable effects, in altering the proportion between capital and revenue in favour of the former. The new notes go into the market as so much additional capital, to purchase what is necessary for the conduct of the concern. But, before the produce of the country has been increased, it is impossible for one person to have more of it, without diminishing the shares of others. [Emphasis added].

This diminution is affected by the rise of prices, occasioned by the competition of the new note, which puts it out of the power of those who are only buyers, and not sellers, to purchase as much of the annual produce as before: While all the industrial classes - all those who sell as well as buy - are, during the progressive rise of prices, making unusual profits; and, even when this progression stops, are left with the command of a greater proportion of the annual produce than they possessed previous to the new issues. (Edinburgh Review, February 1811, pp. 363-372.)

Henry Thornton's Paper and Credit, 1802, acknowledged the issue; Jeremy Bentham dealt with it in some detail in his Manual of Political Economy finished in 1804 but not published until 1843. As we can see, the phenomenon of "forced savings" or - as Bentham called it - "forced frugality" was known to nineteenth century economists. To these men, savings in excess of investment was not a mystery to be solved but an issue to be discussed along with its consequences. They fully realised that for 'savings to exceed investment' a monetary expansion is necessary, just as Malthus described it

Forced savings is the process by which consumption is forcefully restricted and was discussed at length by Professor Robertson. (Banking Policy and the Price Level, Augustus M. Kelley Publishers, 1989, § 4, p. 47). Professor Pigou simply described it as a process by which the banking system transfers purchasing power to business which then uses it to command resources that would have otherwise gone into consumption. This is basically the same process that the Austrian school uses to describe forced savings.

I realise that readers might still find the issue somewhat obscure. As already noted, in real terms investment must always equal savings because they are aspects of the same thing, i.e., the resources being directed into investment are the same resources that would have gone into the production of consumers' goods. Therefore, not only are they equal, they are also identical. The introduction of money, however, complicates matters. In money terms investment can exceed savings just as savings can exceed investment. But this is only in terms of values.

When investment exceeds savings we have inflation and when savings exceed investment we have deflation. These are processes that the classical economists obviously understood, unlike so many today. Let us take a hypothetical situation in which savings and investment in money terms are equal. In order to expand investment, the banks create new deposits for business to draw on. These deposits enable business to command resources that were destined for consumption.

It now appears that investment (capital accumulation) is being created without savings because the money value of investment is greater than savings. This illusion completely deceived the 1959 Radcliffe Committee that erroneously reported "heavy investment in new capital assets" without an increase in current savings taking place. But as Professor Hutt pointed out (The Keynesian Episode: A Reassessment, LibertyPress, 1979), "savings must have been forthcoming through decisions somewhere." It follows from this that differences between savings and investment are due to changes in the money supply and not magnitudes. Once again, when investment exceeds savings new money must have been created.

Let us see what these studies mean in real terms. If investment can really exceed savings, this mean that capital goods can be literally created out of nothing! This is true magic pudding economics. But as we have seen you need resources to create resources. To argue otherwise is to argue that land, capital and labour can be conjured up at will; that economies can grow without ever sacrificing consumption, that farmers can grow wheat without planting seed, that milk can be produced without cows, that a country can increase its productive capacity without accumulating capital and that the Tooth Fairy is a live and well and living with Keynes.

Of course, countries with similar saving rates can, even in the absence of monetary changes, have different growth rates. Again, there is no mystery. Hong Kong on one side and Singapore, Malaysia, Korea et al on the other side provide a graphic example of divergent growth rates.

A 1992 study by Professor Alwyn Young found that Singapore and Hong Kong were very similar to each other and both more or less started on an equal footing in 1945 and both were free trading city states with no manufacturing base. By 1960 their GDPs per head were about equal and from that year both began to grow at about 6 per cent pa for 25 years. The fundamental difference between them was that Hong Kong adopted a free market approach while Singapore opted for interventionism (industry policy: it sounds better than planning).

The results are remarkable. Hong Kong leapt ahead of Singapore. From 1970 to 1990 output per worker in Hong Kong rose by 150 per cent compared with just over 100 per cent in Singapore. Moreover, Hong Kong's output per unit of capital was comparatively constant during this period while Singapore's fell by over 50 per cent. By the mid-1980s Singapore's rate of return on capital had fallen from about 40 per cent pa to 11-12 per cent, by the late 1980s and she needed to invest twice as much for the same output as Hong Kong. Furthermore, total factor productivity (the amount produced by a combination of given factors) in Singapore had fallen by 6 per cent while Hong Kong's had risen to 56 per cent.

The point of this is that when comparing growth rates with savings rates, one should look beyond the economic magnitudes to the level of intervention in the economy. This, unfortunately, is rarely done. There is also the non-problem of actually defining investment. For example, residential building is defined as investment because houses, flats, etc. are durable. This is done on the basis of durability. But houses and flats are consumption goods. The only real economic difference between a house and a pizza is time. To define housing as part of the capital structure on the grounds of durability is absurd*.

However, to carry this point further at this stage would add nothing to the debate. What we can conclude, however, is that the more a country genuinely saves, the more economic growth it will enjoy, providing the appropriate institutions are in place. Suffice to say that the so-called mystery of an economy growing (accumulating capital) at a faster rate than it saves is found to be no mystery at all. It turns out be nothing more than a case of forced savings (inflation).

What is mystifying is how so many of today's economists can be so ignorant of these matters. These confusions would never arise if most of today's economists had been properly educated in the first principles of savings and investment.

The lesson of savings should now be abundantly clear: to save is to grow. Therefore anything that hinders savings retards growth. So stark and so simple is this truth that even the most strident critics of tax cuts should be able to grasp it - but only if they want to. Unfortunately Obama has made it abundantly clear that his ideology is what matters. And if that comes into conflict with greater economic growth so much for growth. He made this very clear with his comment about living standards and capital gains taxes. This is why he and his ideological soul mates are impervious to economic reasoning and facts. He is remaking America.

---

*Capital goods are future goods. This means they are intermediate that goods that are eventually transformed into consumer goods. Put another way, the services of consumer goods are directly consumed while the services of capital goods serve consumers indirectly. According to this definition durability does not define capital goods but the position in the capital structure does.

What is more, the good must be reproducible, i.e., land is not capital. Oddly enough Hayek considers houses to be capital goods, so far as they are non-permanent. Additionally, we have to replace them by something if we want to keep our income stream at a given level (The Pure Theory of Capital, The University of Chicago Press, 1975, pp. 77-78).

But the same thing can be said of cars, televisions, books, furniture. In fact, just about any household appliance. Huerta De Soto adapts the same approach as Hayek with respect to durability as a definition of a capital good:

Fourth, durable consumer goods satisfy human needs over a very prolonged period of time. Therefore they simultaneously form a part of several stages at once: the final stage of consumption and various preceding stages, according to their duration. (Money, Banking and Credit Cycles, Ludwig von Mises Institute 2002, p. 300.)

Comments

[Steve in Gr...:]

Thanks, Mr. Jackson, for another great article. I agree with your final paragraph. Big government ideologues of both parties are deliberately choosing to cripple America's economy.

Mar 23 10:19 AM

[GEOMAC:]

Wrong again.

Mar 23 10:51 AM

[Atlanta Pri...:]

Very interesting article. thank you for sharing. I do hope you are wrong but the signs are not good.

Mar 23 10:55 AM

[fireball:]

i thought the forcing of america into modern (same old failed system relabeled) socialism was the change obamamama promised. i thought "yes we can" was the slogan of making the industrious pay for the derelicts.
i thought i was all alone in my peaceful protest of retiring and refusing to let my income be ravaged but over the weekend with a little research i found a growing movement. my favorite were the letters from small business owners who are downsizing to continue to try to hold their life's work together. they go into their parking lots and fire the employees with obama bumper stickers.
jfk gave an interesting speech about tax cuts stimulating growth and raising revenue.

Mar 23 11:02 AM

[ding:]

The simpler we make government solutions, the harder it is for our politicians to exploit these systems for their own self interest and the self interest of their political supporters. This is not a party thing. This is a human thing. Republicans and Democrats both do it. It is not in our best interest, and the only way we can stop it is to force them to simplify the systems our government legislates. History has shown that when men are tempted a certain number will succumb to temptation. We the People must demand systems be simplified so that they will not be politicized by men. That way, no matter who is in office, the temptation has been removed or minimized. The biggest system being used today by our politicians to reward and punish political allies and opponents is the tax code.

Mar 23 11:48 AM

[ding:]

Capitalism did not fail, morality did.

According to Forbes, supply-side capitalism is a simple and benign idea: Only suppliers can supply us with goods and services; the demand side can't will a product or service into existence, no matter how hard it tries. Society therefore advances economically when it reduces tax and regulatory barriers to the creation of goods and services. Capitalism only fails when it is devoid of underlying morality.

Mar 23 11:52 AM

[axelrod608:]

>> "Obama and his merry band of economic vandals" >> Cheap name calling.

>> "conservatives tend to instinctively realise that tax cuts stimulate savings and production" >> Overly simplistic generalization, true only when certain conditions exist - namely overly harsh tax rates - which is NOT currently the case. US income tax rates are lower than most countries AND the smorgasbord of tax-advantaged tax dodges enables Billionaires to pay less than factory workers.

Savings rates are low when money is cheap. Low interest rates like the current ZIRP policy creates conditions where the reward for saving is negligible. Buffet can get 10 - 15% but CD and Treasury buyers get 2 - 3%, less than inflation.

Yes, government spending at all levels is insane and out of control. This, not toxic assets, bad banks, foreclosures, etc is the number one problem. The feds are 25% of GDP. Add in all the states and local governments and you find government at 1/3 to 1/2 of GDP. Which would be OK if they provided essential services like health care. They don't.

To be fair, you must admit that the Republicans are no better than Democrats at holding the line on government spending. One is "tax and spend" the other is "Borrow and spend". There are less than a dozen true conservatives in all of Congress.

The national debt DOUBLED in the reign of George II and a mostly Republican Congress. There are NO good guys in high places. Except Ron Paul who is considered a whacko by most of his own party.

People save if they get a fair return or if they are mature enough to understand the concept of a "rainy day". Those who use credit cards as an alternate form of income don't.

We can't legislate maturity, but we could scrap the ZIRP policy and make saving worth while (and tax exempt).

Mar 23 12:04 PM

[Socialism c...:]

Well, I guess the one silver lining in what the Obama admarxistration is doing is that it will finally kill Keynesian notions for once and for all! After that, assuming we still have a country, we can rebuild under a system that has purged Keynesianism from its economic policies and returned to the idea that peoples' money belongs to them, and that confiscatory taxation of any amount is anathema to Liberty!!

fairtax.org

Mar 23 12:11 PM

[Socialism c...:]

IOW, abolish the IRS and confiscatory taxation, move to a consumptive tax.


On Mar 23 11:48 AM ding wrote:

> The simpler we make government solutions, the harder it is for our
> politicians to exploit these systems for their own self interest
> and the self interest of their political supporters. This is not
> a party thing. This is a human thing. Republicans and Democrats
> both do it. It is not in our best interest, and the only way we
> can stop it is to force them to simplify the systems our government
> legislates. History has shown that when men are tempted a certain
> number will succumb to temptation. We the People must demand systems
> be simplified so that they will not be politicized by men. That
> way, no matter who is in office, the temptation has been removed
> or minimized. The biggest system being used today by our politicians
> to reward and punish political allies and opponents is the tax code.

Mar 23 12:14 PM

[basehitz:]

Thank you for the imformative post. Frankly, I was expecting to see a lot more personal attack responses. So, either the socialists won't read your articles, or the wisdom of the argument is obvious to all but the most committed zealots. BTW, though I am a conservative, I agree with the criticism that recent Republican congress and administration failed to live up to conservative principles. But putting in full blown socialists as a "solution" is even worse, unless true capitalists regain control of the Republican party and provide solutions, not promises we cannot afford in an attempt to get votes.

Mar 23 01:13 PM

[brokerinbir...:]

Please explain, GEOMAC, why you believe this is wrong.


On Mar 23 10:51 AM GEOMAC wrote:

> Wrong again.

Mar 23 02:13 PM

[ain't no fo...:]

its not that we "libs", "dems", "socialists", "commies". "muslim sympathizers" aren't putting up attack posts, its just that we're laughing so hard at that idiot that we don't know where to start.


On Mar 23 01:13 PM basehitz wrote:

> Thank you for the imformative post. Frankly, I was expecting to see
> a lot more personal attack responses. So, either the socialists won't
> read your articles, or the wisdom of the argument is obvious to all
> but the most committed zealots. BTW, though I am a conservative,
> I agree with the criticism that recent Republican congress and administration
> failed to live up to conservative principles. But putting in full
> blown socialists as a "solution" is even worse, unless true capitalists
> regain control of the Republican party and provide solutions, not
> promises we cannot afford in an attempt to get votes.

Mar 23 02:20 PM

[Leftfield:]

Modern economists seem to be empty suits with a title. They miss such obvious facts as, just under 20% is the ideal size for the total government for growth. This observable fact is missed because it won't get them government grants.

Money sends economic signals to producers and investors. Seems to be missed also, along with all the confusing signals government sends.

Now they are getting consumption and savings confused. I think they an Obama are setting the stage soon after the Republicans and banksters made capitalism an easy scapegoat to make the former middle class prosperity of this country seem an illusion. To lead us all the way to serfdom.

Mar 23 02:35 PM

[I am not a ...:]

I'm neither conservative or what ever,just poor but I found this article to be most informative on two levels.one, the content has given me more information on things I already knew in my 'bones' as it were and two,the author must have a memory of an elephant to recall an article of such depth and insight that was published in 1811! Very good stuff and thank you!

Mar 23 05:52 PM

[Tony Petroski:]

"Unlike leftists, conservatives tend to instinctively realise that tax cuts stimulate savings and production."

A simplification: Leftists assume the state has first call on all production, therefore anything less than 100% confiscation is a "gift" from the government to the producer. That means that anything less than 100% confiscation somehow minimizes all the "good" the government can do because the overlords have allowed some of the production to flow through to the serfs.

The conservative (and for that matter, the founding documents of America) assume that men are born free, endowed by their creator with inalienable rights, and that taxes/fees/tariffs are justified in order to create a government big enough to protect those God-given rights but that excessive taxation in order to fund governments to "spread the wealth around" is immoral and anti-American.

Conservatives can also distinguish between wealth creation that produces more resources that is consumes vs. wealth destruction in the form of government-run schemes that consume more capital than it produces even though in the short run that destruction juices up the GDP numbers.

Mar 23 06:13 PM

[B. Johnson:]

The people arguably deserve the burden of the unconstitutional stimulus package as a consequence of not knowing the Constitution and its history. Otherwise they'd be able to argue the following.

The Founders made the 10th A. to reserve the lion's share of government power to serve the people to the states, not the Oval Office and Congress. In fact, Chief Justice Marshall had established the following case precedent, now wrongly ignorned, which limits the power of the feds to lay taxes.

"Congress is not empowered to tax for those purposes which are within the exclusive province of the States." --Chief Justice Marshall, GIBBONS V. OGDEN (1824) supreme.justia.com/us/...

So Obama's stimulus package can be regarded as the feds returning to the states money that they have stolen from the states anyway.

Also, the way that we got into this federal spending mess is as follows. Regardless that the states are the ultimate seat of power in the good old USA, the Constitution-ignoring MSM has been brainwashing citizens since the time of constitutional flunky FDR to think that the Oval Office is a throne room. And it seems like the best response of the constitutionally ignorant people to ongoing federal government corruption is to complain about big government as if doing so was their idea of the persuit of happiness.

The bottom line is that the people need to wise up the major problem of federal government usurpation of state powers and do the following. The people need to work with their state legislators to repeal the 16th Amendment, the amendment that gives the feds the power to tax citizens directly. The problem with that amendment is that it makes it too easy for the corrupt federal government to lay constitutionally unauthorized taxes, in my opinion.

Again, the 16th A. has to go!

Mar 23 07:38 PM

[terryg8:]

Amen Brother! Still what a price to pay for the envy of so many of those who work so hard for all they have. These are the Obama supporters.


On Mar 23 12:11 PM Socialism cannot compete! wrote:

> Well, I guess the one silver lining in what the Obama admarxistration
> is doing is that it will finally kill Keynesian notions for once
> and for all! After that, assuming we still have a country, we can
> rebuild under a system that has purged Keynesianism from its economic
> policies and returned to the idea that peoples' money belongs to
> them, and that confiscatory taxation of any amount is anathema to
> Liberty!!
>
> fairtax.org

Mar 24 12:56 AM

[terryg8:]

Thanks for this article! I must assume from what I have read that you feel we are well on our way to massive inflation. Is that correct?

Mar 24 12:59 AM

[oldfolkdancer:]

You don't know where to start because....you don't know.


On Mar 23 02:20 PM wpdragon wrote:

> its not that we "libs", "dems", "socialists", "commies". "muslim
> sympathizers" aren't putting up attack posts, its just that we're
> laughing so hard at that idiot that we don't know where to start.
>

Mar 24 10:43 AM

[brokerinbir...:]

I agree, you don't know where to start because, it's hard to rationalize the largest ponzi scheme in world history. It's hard to rationalize the government mandated thuggery that this administration is conjuring. It's hard to raionalize the idea that minorities should be enslaved to and by leftist ideology when it has not, after 40 years and trillions of dollars already spent, done one thing to help them. "Capitalism has failed us" so I hear you say. Yet, please point to one of the Worker's Paradises of the left and tell me how wonderful life is there compared to that in a capitalist country. Gee...I have never seen millions flocking to USSR or North Korea to build a better life (except maybe high-ranking members of the Communist Party, but then those aren't millions).


On Mar 23 02:20 PM wpdragon wrote:

> its not that we "libs", "dems", "socialists", "commies". "muslim
> sympathizers" aren't putting up attack posts, its just that we're
> laughing so hard at that idiot that we don't know where to start.
>

Mar 24 11:06 AM