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All Da King's Men

The Economics Of The Impossible

By David King Published: September 29, 2012

My liberal blogger friend, the Reverend from the Blog Of Mass Destruction, wrote a post yesterday citing a study by the Economic Policy Institute (EPI). The EPI study determined that President Obama's economic plan would create more jobs over the next couple years than would Republican challenger Mitt Romney's economic plan.

For those of you not familiar with the EPI, it is a progressive think-tank (that laughably bills itself as "nonpartisan".) A quick look at EPI's board of directors puts to rest any notion that EPI is nonpartisan.Thus, when the progressives at EPI say Obama's economic plan is better than Romney's plan, it is akin to the Republican National Committee declaring Romney's plan to be the superior one. You must consider the source. The outcome is almost predetermined.

But just because the EPI is progressive is no reason to dismiss it's findings out of hand. We must consider the merits. I've had far too many liberals on my blog who completely dismiss anything coming from non-liberals sources to do the same thing in reverse myself. That sort of closed-mindedness only produces ignorance. So lets take a look at EPI's findings.

The EPI determined that President Obama's plan would create 1.38 million jobs in 2013 and 2014, while Romney's plan would lose 557,000 jobs over the same time period. Here's how the EPI reached that determination:

"How did EPI come to its conclusions? By using multipliers of the GDP impact of spending and tax policies based on those published by Mark Zandi, chief economist for Moody’s Analytics.

“Large cuts in government spending will exert a strong drag on economic activity while large output gaps persist,” EPI explains. At the same time, “tax cuts, particularly tax cuts for businesses and higher-income households, are highly inefficient at spurring growth.” By Zandi’s calculations, general government spending has a multiplier effect of 1.4 for every $1 spent, while a payroll tax cut for employers has just a 1.04 multiplier effect.

According to EPI, the growth in jobs under Obama’s plan would primarily come from the American Jobs Act, which includes $142 billion in temporary spending, as well as some tax cuts. By contrast, EPI calculates that Romney’s major spending cuts — totaling an estimated $250 billion in net cuts in 2013 and 2014 — would be a drag on growth in the near term. The drag would be bigger if Romney makes his tax reform revenue-neutral, as he’s promised. "

Zandi is one of the main go-to economists for progressives. He's a Keynesian who believes government spending is the key to economic growth. That view is not wrong over the short term, but over the long term, it's a recipe for disaster, especially when the government spending is accompllished by running up the debt. I'd also point out that if debt-financed spending was the key to recovery, our economy should be booming, because we have run up $16 trillion in federal debt, and Obama has run up more debt than any President in history...but somehow the economy is still weak and unemployment is still high. In spite of this, Obama recommends we do more government spending, because that's really all he can think of to do.

Zandi's beliefs rely on the magical "multiplier effect" of government spending. He calculates that every dollar of government spending  multiplies into an economic gain of 1.4 dollars, whereas tax cuts only have a multiplier effect of 1.04. This is why progressives love him. It ties in perfectly with their tax and spend philosophy. Non-Zandian economists believe Zandi has doubled the real multiplier effect of government spending. The non-Zandians believe the multiplier effect is closer to 0.6-0.7, which sounds much more realistic to me. I've always found it curious that progressives who would laugh at the supply side argument that "tax cuts pay for themselves" (in most cases, the progressives are right about that), would then turn around and buy into the magical government spending multiplier argument that Zandi puts forth. It's the supply side argument in reverse, and about equally credible (or incredible).

As I said, government spending can buoy the economy over the short term. There's no arguing that point. When Obama borrowed $817 billion for his big stimulus package, of course it had a temporary effect. There's no way to inject that much money into the economy without it having some effect. The problem is, the stimulative effect is TEMPORARY, and when the effect wears off, we still have the DEBT associated with it. All that was accomplished was a reshuffling of the economic deck. Economic pain wasn't avoided, it was merely delayed, and because we must pay interest on our debt, the overall effect of the borrowing is an economic NEGATIVE. And the more we borrow, the more negative the lasting effect becomes (which is why we currently pour hundreds of billions of dollars down the toilet every year paying interest on our debt).

Prolonged short-term economic thinking by our government whizbangs has resulted in our massive debt, our massive underfunding of entitlement promises, and massive economic problems coming very soon for everyone in this country. Despite this, the EPI is telling us we should keep doing what we've been doing, we should keep spending and keep borrowing. The EPI says this is the wise course. I beg to differ. There's a word for what the EPI is promoting, and that word is "denial". But rather than face up to our economic reality, Obama and the EPI are promoting the economics of the impossible, the philosophy that believes we can spend all the money we want today and there will be no price to pay for such irresponsible behavior tomorrow. Why anyone would listen to these preachers of economic armaggedon is beyond me, but apparently many people ARE listening. Apparently, many people are willing to destroy the future in order to make themselves more comfortable today. I don't understand it. How did we go from the greatest generation to the most self-centered generation is such a short time ? How did we go from self-reliance to a dependent sense of entitlement is such a short time ? If this election is a reflection of the character of our nation, I don't much like what I'm seeing in our national mirror.




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