Latest posts by Andrew Moran (see all)
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Do you know the difference between a Republican and a Democrat? One is in power and the other isn’t. And this is certainly true when looking at the two parties’ faith in government spending. For whatever reason, both sides of the aisle believe that government is a wealth generator. Democrats openly promote the idea, while Republicans clandestinely have confidence in the notion.
There is a reason why President Donald Trump was referred to as the “king of debt.”
For the last eight years, the Republicans attacked former President Barack Obama for his pecuniary mishaps. The GOP continually chastised the previous administration for its doubling the national debt, running budget deficits and spending like drunken sailors. This helped Republicans gain control of the Oval Office, House and Senate. But so far it looks like it was all talk.
Speaking in an interview with The Economist last week, President Trump vowed to grow the economy through higher debt and deficits. The president acknowledged that the U.S. needs to “prime the pump” – a mix of government spending and tax cuts – to achieve better growth:
It is OK, because it [the deficit] won’t increase it for long. You may have two years where you’ll…you understand the expression “prime the pump”?
We have to prime the pump.
We’re the highest-taxed nation in the world. Have you heard that expression before, for this particular type of an event?
Trump added that he came up with the prime the pump expression “a couple of days ago.” However, this is an incorrect assertion because the term is part of Keynesian economic theory. As part of economist John Maynard Keynes’s economic philosophy, pump priming is meant to boost aggregate demand by increasing state spending to invigorate private spending.
Although Trump’s odd blunder is making headlines, it should be the economic measures he’s employing that should confound the public.
Deficit-financed spending has been a concept vilified by the fiscal conservative and libertarian wings of the Republican Party for the last sixteen years. The idea that a government can stimulate the national economy by spending and going into debt has been shattered by free market economists for years.
Should the Republicans endorse the president’s plan, they abandon their ostensible anti-deficit principles they have championed for the last eight years.
That said, as legendary free market economist Milton Friedman noted, the deficit is a symptom and spending is the disease:
Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax … If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that, you can stop worrying about the debt.
No matter how many times the Trump administration defends “the biggest tax cut in U.S. history,” they fail to realize that spending is taxing. There will always be a party that thinks government spending is the panacea to a nation’s economic setbacks. Whether it is rising unemployment or lackluster growth, the remedy for the politicians in Washington is even more deficit-financed government spending.
What makes the problem even worse is that Trump is neglecting his “world’s greatest axe.” He is cutting taxes and avoiding big spending cuts simultaneously, measures that will increase the $20 trillion debt.
This kind of Keynesian tool is meant to encourage private sector spending. However, what Trump and other Keynesians fail to comprehend is that spending and deficits hurt the private sector, both producers and workers.
Government outlays divert resources from the private sector and extract money from the producers. It further crowds out private sector borrowing and leaves these reserves into the hands of bureaucrats.
Moreover, much of the budget deficits are financed through government securities sold to citizens, who buy them with money currently in circulation and in their savings. If a deficit did not occur, citizens would have used these savings to purchase corporate securities. Businesses would then allocate these funds to buy capital goods and to pay wages. When the opposite occurs, this lowers money wages and real wages because it increases prices and unit costs.
Despite politicians believing that you can always get something for nothing, every new spending bill must be paid for today or tomorrow. By postponing the state’s bill payments, President Trump merely exacerbates the problem. Unpaid government expenditures lead to national insolvency or inflation through Federal Reserve monetization. You can pick your poison.
Keynesianism always fails.
Prior to the era of Trump, many Republicans and conservatives understood this. Remember when Breitbart regularly blasted the Obama administration for its reckless spending and budget deficits? The website is now cheerfully getting Americans ready for these exact policies.
[T]ax cuts that are “paid for” won’t do much to stimulate the economy. They just trade tax cuts in one area for tax hikes in other. To be truly stimulative, tax cuts should raise budget deficits. And since it is likely that the economy will contract in the not-so-distant future, implementing a stimulative tax cut is wise.
Four months into the new administration, the right has forgotten all about spending cuts, balanced budgets and reining in the debt. They are indeed under the hypnotic gaze of President Trump.
Apparently, the Keynesian prescription for economic recovery has garnered bipartisan support. At least we can be entertained by Keynesian economists flipping their positions, like Paul Krugman. He demanded deficit-financed spending just before the election, but this ended when Trump agreed.
Economist Murray Rothbard regularly averred that taxes should permanently be cut. But he also warned that budget deficits will always make the population poorer. Unfortunately, as former President Richard Nixon said in 1965, we’re all Keynesians now.