By Michael Tanner
Wednesday, February 27, 2013
According to President Obama, the $62 billion in new
taxes this year imposed as part of the fiscal-cliff deal will have no effect on
economic growth. In fact, the president believes that he can safely impose
another $58 billion in tax increases to replace spending cuts from the upcoming
sequester. And, of course, Obamacare’s almost $42 billion in new taxes (and
regulations) in 2013 don’t have any impact on hiring or investment. But, the
president says, the $44 billion in cuts this year resulting from the sequester
will throw the U.S. economy back into recession.
The president seems to labor under the impression that
nearly all government spending adds to the economy and that wealth in private
hands does not. Certainly, though one can debate the relative efficiency of
programs funded by the government, a case can be made that some government
spending can add to economic growth when such spending truly represents an
investment (to use the president’s favorite buzzword) in, for example,
scientific research, infrastructure, or education. In reality, however, most
government spending has little to do with investing. Even under a fairly broad
definition of “investment,” such spending represents less than 13 percent of
this year’s budget. By far, most of the rest consists simply of transfer
payments — that is, taking money from one person and giving it to another.
Transfer payments add to GDP only in a technical sense, but they do not create
any new wealth or increase productivity.
On the other side of the equation, it is important to
remember that every dollar that the federal government spends must first be
extracted from the private sector, through either taxes or borrowing. That
means that those resources are not available for the private sector to invest
in ways that grow the economy.
President Obama may think that the rich sit around like
Scrooge McDuck, watching piles of money in their vaults, but in reality
individuals, even rich ones, either spend their money or they save and invest
it. If they spend it, it helps provide jobs for the people who make and sell
whatever it is they buy. If instead the money is saved or invested, it provides
capital to start businesses and hire workers. And so, even in those few cases
where government spending can be termed an investment, it displaces a certain
amount of private investment, thereby reducing the net return on the
government’s action.
That would suggest that cutting government spending, even
through an admittedly flawed process such as the sequester, might ultimately be
better for the economy than preserving government spending at the cost of
higher debt or taxes.
But, as the president and his supporters (Paul Krugman in
every other column, for example) might respond, hasn’t Europe shown us that
cuts in government spending can devastate an economy? Great Britain is held up
in particular as an example of how a country cannot cut its way to prosperity.
Britain has embraced austerity and its economy has slipped back into recession.
But Britain actually shows just the opposite. The British
government has made few real spending cuts. In real terms, total government
spending did decrease marginally from 2011 to 2012 by £11 billion, or 1.6
percent of total spending, but it still remains £55 billion above 2008 levels
after adjusting for inflation. On the other hand, there have been plenty of tax
hikes, including increases in the Value Added Tax (VAT), income taxes for high
earners, capital-gains taxes, payroll taxes, and taxes on home sales. Sound
familiar?
Veronique de Rugy of the Mercatus Center has pointed out
that in Europe generally, countries have raised taxes far more than they have
cut spending. To blame slow European growth on spending cuts, then, would be
quite a stretch.
In the U.S., the cuts under the sequester amount to
roughly 0.3 percent of GDP. No doubt they will impose a certain amount of pain
on individuals directly affected and on communities that depend heavily on
federal payments. But they are unlikely to tank the U.S. economy. On the other
hand, continuing to raise taxes or to run massive deficits will almost
certainly continue to slow economic growth.
Higher taxes, more spending, more debt — that, not the
sequester, is something we should really be afraid of.
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