The Spending Trend is Not Sustainable
Two recent articles highlight the danger of Washington's conventional economic wisdom.
This one from USA TODAY suggests that Americans are receiving less pay from work and more pay from the government (Private pay shrinks to historic lows as gov't payouts rise - USATODAY.com).
"Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year."
"... At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010."
Donald Grimes, an economist from the University of Michigan concludes "The trend is not sustainable."
Another study published this week highlights the problem. Recent research from Harvard Business School finds that government spending diminishes private business (Stimulus Surprise: Companies Retrench When Government Spends — HBS Working Knowledge).
The report finds that government projects hurt private business in three ways. First, government frequently takes on projects that the private sector was already planning. Secondly, government hires away workers from the private sector. Third, government creates uncertainty in the marketplace. In other words, the stimulus is a suppressant.
The report finds that states receive more federal funds if they are represented by a powerful Senator. If a Senator is chair of one of the top-three congressional committees the state receives a 40 to 50 percent increase in earmark spending.
Joshua Coval, one of the co-authors of the study, comments, "It was an enormous surprise, at least to us, to learn that the average firm in the chairman's state did not benefit at all from the increase in spending. Indeed, the firms significantly cut physical and R&D spending, reduce employment, and experience lower sales."
He concludes, "Our findings suggest that they [policymakers] should revisit their belief that federal spending can stimulate private economic development. It is important to note that our research ignores all costs associated with paying for the spending such as higher taxes or increased borrowing."
Basically, he's saying that stimulus dollars poison private industry and this study doesn't even account for the additional negative effects of borrowing/ tax collection.
The study stands in stark contradiction to Christina Romer, head of the White House Council of Economic Advisors, who suggested today that "It would be a mistake for the U.S. to rapidly wind down fiscal stimulus measures to bring down the deficit."
The White House Council of Economic advisors basically tells us that the "economy garden" should be planted with weeds in order to stimulate "business flowers."
Added by a friend of Dave Edwards for Congress
