It’s Consumer Spending, Stupid

Dollars funnel

Now that the debt ceiling debate is behind us (for now), the nation’s focus will quickly return back to the single most important issue for most Americans. Jobs. To quote the great James Carville, “It’s the economy, stupid”. The economy is the greatest challenge that we all face today and with unemployment hovering over 9%, the three biggest issues are jobs, jobs and of course, jobs.

There is still a large percentage of folks, many of them in Washington, that somehow believe that the Government creates jobs. For whatever reason, their beliefs lead them to conclude that the solution for a poor economy is for the Government to spend more money, the logic being that by pumping more money into the economy, jobs will be created, alleviating the financial burden on many Americans. Herein lies the problem. That is just simply not true, and I’ll tell you why.

Does Government Spending boost the economy? The short answer is yes, but there’s a lot more to it than that. Ultimately, when the Government spends money, it does help boost economic activity, but the results are temporary and finite. Why? Simply put, because someone has to pay for it. For the Government to spend money, they first have to take that money from somebody else (you), or engage in deficit spending financed by borrowing money which will have to be paid back with interest later (with funds also taken from you, your children, grandchildren, etc.).

Any economic boost provided by Government spending will only last as long as the spending does. It will eventually come to an end, which is why stimulus is not the solution. Government spending programs, such as the American Recovery and Reinvestment Act (a.k.a., the Stimulus Bill) do nothing but redistribute wealth from one citizen to another, which does nothing to improve the economy on a long term basis and has a very limited effect even in the short term. The Government provides services, but it doesn’t create anything.

Even if we could afford to pump much more money into the economy, it still wouldn’t be enough to make a lasting difference. The ARRA spent about $670 Billion over the course of two years. We have a roughly $14 Trillion GDP. The amount of money we spent equals about 2.3% of our GDP per year and, as one would expect, had very little if any impact. So how much would we have to spend to make an impact? I don’t think any of us knows, but the one thing we can probably agree on is that it would be far more money than we could ever afford to spend.

In order for any economic model to be self supporting, there has to be some type of innovation that generates demand for something that people are willing to pay for. Most people agree that we need a Government, are willing to pay taxes to support it and will receive benefit from it, but that’s not the same as voluntarily spending your money for something that you view as tangible.

Ask yourself this question:
What would be a more successful business model, a business that relies on forced payments from its customers, or one that creates a product or service that everyone wants to buy?

The answer is pretty obvious.

Average Daily Consumer Spending from 10/15/2009 through 6/25/2011 - Source: Gallup
Average Daily Consumer Spending from 10/15/2009 through 6/25/2011 - Source: Gallup
This is where Consumer Spending comes in. Consumer Spending is what drives economies (example). The reason that unemployment is high and people are struggling to find jobs is because there is just not much demand out there for more manpower. It’s not because the “evil corporations” are hoarding cash and don’t care about the public. It’s simply because with Consumer Spending being flat for the last few years, there is not enough demand to support hiring more people. When Consumer Spending increases, businesses will need more manpower, jobs will be created and unemployment will decrease.

So, the question becomes, what do we do? If Consumer Spending is the answer, how do we get the public to spend more money when they don’t have it in the first place?

Well, the first thing that needs to happen is that the Government needs to stop putting more regulatory burdens on businesses. This directly increases costs, which results in less money available to expand or hire new people. In the last three years, there have been hundreds, if not thousands of new regulations that are making the problem worse, not better. It’s not just Congress, either.

Sure, Congress has passed Health Care “reform” and Wall Street “reform”, both of which will cost taxpayers and the private sector Trillions of dollars, but that’s only a fraction of the hurdles that have been imposed. The FTC, FCC, EPA and other alphabet-soup departments have used their authority to implement hundreds of new regulations, all of which cost businesses money which makes it much harder for them to invest in more manpower.

Do we need regulations? Yes, but we need only enough regulation to keep everyone on the straight and narrow. We do not need, for example, regulations allowing the FCC and Attorney General to seize websites that may be engaging in Copyright infringement (which is one of the regulations that was put in place last December). Why? Simple. That’s what Civil Courts are for. If a company’s intellectual property rights are being violated, there are plenty of pre-existing legal remedies. We do not need Eric Holder to wake up one morning and shut down eBay because he thinks they’re violating someone’s rights. That’s up to eBay’s attorneys to deal with, not the Federal Government.

We need tax reform, and yes, we need more tax revenues, but we do not need higher taxes. We need more taxpayers. The thing we need to remember is that once again, Consumer Spending is what drives the economy so anytime you take tax dollars from anyone, it results in less money they will have to spend. True tax reform will result in more people paying taxes (reducing their ability to spend), but it will also result in most current taxpayers paying less (increasing their ability to spend).

This also includes Corporate taxes. Many seem to the think that businesses should pay more in taxes. They use the class warfare mentality of “corporate jets” (a provision that was made possible by President Obama’s stimulus bill, I might add). But this is just the opposite of what we should be doing. Even the President said in his State of the Union speech that we should lower corporate tax rates to help companies be more competitive so they can create more jobs. There is a simple truth to corporate taxes. Businesses don’t pay taxes, Consumers do. The cost of taxes on businesses are factored in to everything that you buy, so higher taxes result in higher prices for goods and services.

Despite all of the criticism (almost all of which is just flat our untrue), President Bush’s tax cuts had a strong impact on the economy. Remember, in 2001, the Dot Com bubble had burst and we were sliding into a recession. Bush’s solution was not to intervene with Government spending, but to allow Americans to keep more of their own money. His plan cut tax rates, increased the child tax credit, increased the standard deduction for married couples, and increased contribution caps for a variety of savings programs.

It’s important to note that these changes primarily benefited working class people, not the rich, and the end result was that GDP growth went from 0.3% in 2001 to 6.5% in 2004. This was the fastest GDP growth since 1985, and was faster growth than we experienced during the Dot Com boom of President Clinton’s tenure. The rich, even though their rates were lowered, actually ended up paying an even larger percentage of the tax burden. In addition, the notion that the tax cuts contributed to our debt is absolute folly.

Between 2002 and 2007, federal income tax revenues increased by 39%. Not only did revenues increase, but they did so at a faster rate than the economy, so the claims that it “cost us” $1 Trillion or more is just flat out not true. To support that theory, one would have to operate under the assumption that without the cuts, tax revenues would have more than doubled over the same time period. Being that the cuts were implemented because we were entering a recession, I’m going to go out on a limb here and say that anyone with an IQ of more that 10 can see that would never have happened.

When it’s all said and done, I’m not the “tax cuts are the solution to every problem” kind of guy. I must say that before I started writing this I was of the belief that we need tax reform, but not right now. True tax reform would help more than it hurts, but it would still hurt a large number of people so it would be better to phase it in over a number of years. I still believe that, but after looking at all the numbers again, my position has changed.

We need to cut taxes and we need to cut them now. We should cut taxes across the board for everyone, rich and poor. Not because it’s a partisan position, but because it’s the most effective way to increase Consumer Spending. Yes, it will hurt the nation’s budget in the short term, but we’re currently running $1.6 Trillion deficits. These deficits are caused by reduced revenues caused by the recession and massive increases in spending which have had almost no impact.

Why not replace the spending with tax cuts?

We would still have the deficits for a while, but we’re going to anyway. Cutting taxes, and then ultimately reforming the tax code, would put us on a path to grow the economy and create jobs, increasing tax revenues at the same. Tax cuts don’t create jobs because people go out in mass and start businesses and/or hire more people (although they do to some extent). The main reason tax cuts create jobs is because it increases Consumer Spending. It’s a simple truth that the more money people have to spend, the more they actually will spend.

It’s Consumer Spending, Stupid.


+Kevin A. Nye

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