23 June, 2011

The Same Failed Policies Of The Past

How many times have you heard a Democrat say that with respect to Republican economic plans? Well a search for “same failed policies of the past” (in quotes) on Bing yields 76,600,000 results. The number one hit is a page entitled “Vote Democrat”. So, I’m guessing they’ve mentioned it once or twice.

What are these same failed policies? Well, they tend to bring up that comment whenever a Republican says something about “tax cuts” and “growing the economy”. Liberals seem to think that tax cuts do not grow the economy. In fact, using Bing once again, this time searching for “tax cuts do not” yields another 44,200,000 results. A quick scan shows that phrase typically followed by “pay for themselves”, “create jobs”, and “increase revenue”. So, I think I’m on the right track.

They point to the relatively weak growth from 2003 to 2007 as the basis for their argument, completely ignoring the economic growth after taxes were cut in the 90s and the economic growth after taxes were cut in the 80s. It is important to note that while the growth during the mid 2000s was weak, that it was sustained. We had 52 consecutive months of job growth. And yes, that is a record. In fact, while tax cuts have not always lit the economy on fire (more on why that might be in a later post), it’s difficult to find a time when the economy did not improve after tax cuts. This has been proven at both the state level and the federal level.

But there are some policies that have been tried multiple times and are nearly unique in their complete record of abject failure. These are raising taxes, increasing debt past 90% of GDP, and government funded “stimulus”. I’ve covered the last of these three in a previous post, so I’ll just talk about the other two today.

The first should be obvious, but I’ll elaborate a tiny bit (this will also be covered in more detail in that same later post). Taxes increase the cost of doing business. Anything that increases the cost of doing business reduces the amount of funds available for business growth. Simple logic dictates that limiting funds available for growth would then limit growth itself. No, I’m not going to provide any links or studies that prove this. I’m not even sure there are any. If you’re incapable of grasping this simple point, then you are incapable of even the most basic understanding of capitalism.

That leaves us with the second one, high debt to GDP ratio. Look at the pic below:

The picture paints a couple trillion words, and is from this McClatchy write up of a National Bureau of Economic Research report entitled “Growth in a Time of Debt”. The report looks at 200 years of economic data from 44 different countries. The whole thing is worth a read, but I’ll include a couple key excerpts.

Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.


The simplest connection between public debt and growth is suggested by Robert Barro (1979). Assuming taxes ultimately need to be raised to achieve debt sustainability, the distortionary impact imply is likely to lower potential output. As for inflation, an obvious connection stems from the fact that unanticipated high inflation can reduce the real cost of servicing the debt. Of course, the efficacy of the inflation channel is quite sensitive to the maturity structure of the debt. Whereas long-term nominal government debt is extremely vulnerable to inflation, short term debt is far less so. Any government that attempts to inflate away the real value of short term debt will soon find itself paying much higher interest rates when it comes time to refinance.


Over the past two centuries, debt in excess of 90 percent has typically been associated with mean growth of 1.7 percent versus 3.7 percent when debt is low (under 30 percent of GDP), and compared with growth rates of over 3 percent for the two middle categories (debt between 30 and 90 percent of GDP).

So, what is the current U.S. debt to GDP ratio? According to USDebtClock.org, it’s about 97.9% as I type this.


All of this information is easily obtainable. One can assume that most member of Congress or at least their staff have this sort of thing and more at their fingertips.

97.9% puts us squarely in the danger zone. A logical person is probably thinking at this point that we need to work at getting out of the danger zone in order to grow the economy. But politicians are not known for being logical…

So, what do the Dems propose? The same things that were tried in the 1930s that didn’t work. The same things they’ve been trying for the last two years. The same things that have been tried and failed all over Europe.

  1. Government stimulus
  2. Higher taxes
  3. Higher debt

Or, as I prefer to call it, the same failed policies of the past.

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