"Our Country!
In her intercourse with foreign nations may she always be in the right;
but right or wrong, our country!"

    --Commodore Stephen Decatur

Wednesday, July 20, 2011

More Hoover-Carterism

Almost a year ago in these pages, the Prolix Patriot dubbed the President’s flawed economic policies a new era of “Hoover-Carterism.” Little has changed since then. In the debate over increasing taxes vs. cutting spending, Obama has led the liberal chorus of Cassandras who warn that cuts to spending will harm the economy far worse than increasing taxes, but there is scant evidence to support their claims. Rather, the only real support for Obama’s dubious policies is his own hubris.

Prior to 20th century, government spending was an infinitesimal fraction of anything comparable to today. Even when the government was not the behemoth that it is now, the economy grew far more quickly than it has in recent years. Then, on February 3, 1913, the state of Delaware--which ironically has no income tax of its own--provided the 36th vote for ratification of the 16th Amendment to the Constitution which created the federal income tax. With increased taxation, the federal government also began spending more money. The effects are striking.

Using data from economists at Saint John’s University and Miami University summarized in the chart above, we see that prior to 1913, real growth rates (after accounting for inflation) averaged roughly 4.2% per year. Meanwhile, the economy only contracted in nine out of more than 100 years. At the same time, there were 43 out of 100 years with better than 5% real growth.

After 1913, real growth rates have only averaged 3.4% per year—almost a full percent less each year than pre-income tax levels. At the same time, the number of years with contractions increased from 9 to 22 out of slightly less than a hundred, while the number of years with better than 5% real growth shrank from 43 to only 29. Worse still, after the creation of the modern welfare state in response to the Great Depression, each passing decade has seen declining growth rates. The last year with real GDP growth above 5% was 1984.

Some will argue that it’s not fair to compare growth rates during the 19th and 20th centuries due to technological and societal changes. However, the agricultural innovations and the invention of the microchip of the late 20th century are no less revolutionary--and probably more so--than the invention of the steam engine which launched the 19th century industrial revolution. If anything, growth today from the agricultural and information revolutions should exceed that of the 1800’s. Instead, we live in a time of economic atrophy.

It’s clear from this exercise that as government taxation and spending have increased as a proportion of economic output, the growth of the economy over time has slowed until today, where it is at a virtual standstill. Despite living in an era of unprecedented technological advancement, the economy is so overburdened with taxation, government spending, and debt, that a year with 5% real GDP growth is now rare.

Obama and his liberal allies claim that more taxation and spending will save us from our current plight, but even a cursory look at history shows just how absurd this Keynesian prescription really is. The hard truth is that the government really has no power to help the economy. Despite the best efforts of tinkering technocrats, the economic growth of the last 60 years has been pathetic compared to historical averages. Rather, the lesson of history shows that the government can do very little help the economy, but is quite capable of doing harm.

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