[Congressional Record Volume 157, Number 134 (Monday, September 12, 2011)]
[Senate]
[Pages S5484-S5486]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
ECONOMIC GROWTH
Mr. KYL. Mr. President, President Obama is about to roll out another
jobs plan. He talked about it last week. This is 2\1/2\ years after the
first stimulus bill, which, with interest, amounted to about $1.2
trillion. His economic advisers have confirmed the fact that this
stimulus concept is actually based on the Keynesian economic theory. As
our Republican leader noted last week, there are now, unfortunately,
1.7 million fewer jobs in America, according to the Bureau of Labor
Statistics, than there were before the President's first stimulus bill.
So the question, obviously, is whether this theory is better in theory
than it is in practice.
I wanted to talk today a little about the two different basic
theories of economic growth and what you do in a situation of economic
downturn, as we have today. How should we be looking at stimulation of
job creation and economic growth? The two competing theories, of
course, are the Keynesian theory, which I mentioned, and what some have
called supply-side economics.
There is no question that the Keynesian theory has been one to which
the President's economic advisers generally adhere. It was used to
justify the 2009 stimulus program and other programs. For example, the
one that sticks out in my mind is the so-called cash for clunkers, but
there were other transfer payment government programs, temporary tax
credits, and others. But the theory in the cash for clunkers is a good
example, which is that in recessionary times, if the government spends
money and gives it to people so that they can spend it, that will
therefore stimulate consumption; that business will respond by
increasing production, and that will create jobs.
Recently, for example, Agriculture Secretary Tom Vilsack said that
because of a theoretical multiplier effect under this model, food
stamps--government money taken from taxpayers and given to people who
are entitled or eligible for food stamps--would actually stimulate the
economy by a factor of 1.84; in other words, that $1 of food stamps
would actually generate $1.84 in economic activity. There are a lot of
problems with that theory. The first is that the multiplier effect
itself has been discredited as not something that, in fact, actually
happens.
A Harvard economist by the name of Robert Barro has explained this,
and I will quote from one of his writings:
Theorizing aside, Keynesian policy conclusions, such as the
wisdom of additional stimulus geared to money transfers,
should come down to empirical evidence. And there is zero
evidence that deficit-financed transfers raise GDP and
employment--not to mention evidence for a multiplier of two.
If [Secretary Vilsack's claim] were valid, this result would
be truly miraculous. The administration found the evidence it
wanted--multipliers around two--by consulting some large-
scale macroeconometric models, which substitute assumptions
for identification.
In other words, economists can prove the multiplier in theory with
these models, but there is no empirical evidence that it has ever
occurred. It is a bit like money growing on trees. The money has to
come from somewhere, and, of course, it comes out of the pockets of
taxpayers or the government borrows it and it eventually has to be
repaid with taxpayer tax dollars.
The second problem is that to the extent one assumes the problem is
that Americans are too broke to spend money, the question then is, How
can the government make that up for us? Aren't the people the
government? Doesn't the government get its money from the people in the
form of taxes or,
[[Page S5485]]
if it borrows, the people's taxes eventually have to pay back the
borrowed money. In other words, we have to pay it back later.
Third, people tend to change their spending habits when they know
they will have greater consistent income over time, such as when they
receive a raise at work. If you give people a one-time payment, the
evidence has shown they either save that or they shift future
consumption forward. In other words, they may buy something now they
were going to buy later. That is where the Cash for Clunkers Program
failed. But it doesn't permanently increase their work effort or their
incentive to invest, which, of course, is exactly what is needed to
jump-start economic growth. The job creators themselves tend to hire
when they know they are going to have permanent tax relief or
regulatory relief, not just when they receive a one-time payment for
something. That is only good for as long as it lasts, but it doesn't
provide the consistent, long-term prospect for income, for example,
that they need in order to take the step of actually hiring a person
and committing to paying that person over time.
Fourth, the Keynesian theory assumes the government has the foresight
to determine or, as President Obama's former National Economic Council
chief Larry Summers said of the stimulus, to target which spending
programs would best create economic growth, but that rarely happens.
The obvious problem with this assumption, of course, is that Congress
does not spend taxpayer money wisely. We see time and time again how a
well-intentioned piece of legislation gets loaded up with special
projects, frequently which are costly to the public and very
questionable in their value. That was one of the things that was wrong
with the stimulus package itself.
There is an eye-opening new set of working papers that reveals the
truth about this. Mercatus Center scholars Garett Jones and Daniel
Rothschild took a look at, among other things, whether Congress did a
good job of targeting the stimulus funds at unemployed workers and weak
sectors of the economy. They surveyed hundreds of firms that received
stimulus funding and gathered more than 1,000 voluntary, anonymous
responses from employees and managers to help shed more light on what
happened to organizations that received stimulus funds. Here is what
they wrote:
Our survey finds no evidence of such [Keynesian] targeting
occurring, at least not successfully.
For example, one city was given $4 million to improve energy
efficiency even though a budget shortfall had just forced it to lay off
185 public workers. In another case study, a Federal contractor was
instructed to purchase more expensive tiles than he needed for a
particular project. The theory was, in that way the government could
claim the stimulus money was getting out the door faster. This isn't
the way to spur economic growth. And I believe most Keynesians believe
that what the government spends its money on matters.
Moreover, the study I referred to also found that less than half of
those hired with the stimulus funds were unemployed--about 42.1
percent. Jobs were simply moving from one place to another. The authors
of the study wrote:
Hiring is not the same thing as net job creation. This
suggests just how hard it is for Keynesian job creation to
work in a modern, expertise-based economy.
In other words, while an employer might steal an employee from
another employer, that is not the same thing as creating a net new job.
So the bottom line here is there is a major misconception that
consumption fueled by government spending actually creates jobs. It
turns out that it doesn't. It just inefficiently moves borrowed money
around with a bill that has to be repaid later.
I believe it is also important to remember that economic growth stems
from combining three inputs: labor, capital, and technology. These
three factors of production result in output we can then consume. This
is the beginning of the difference between the Keynesian philosophy and
the supply-side philosophy, which focuses on productivity. And what is
required for society to be more productive? Labor, capital, and
technology. Properly applied, when these three aspects of an economy
are well-aligned, the economy can grow, jobs can be produced, and
people will consume, but they will be consuming things that have been
produced by the businesses of the country. Without labor, capital, and
technology, there can be no consumption. I mean, that is obvious.
Focusing on policies that stimulate consumption targets the wrong side
of the equation. In order to get the economy going, you need to focus
on the inputs.
There is an incidental problem here. Stimulating consumption also
raises prices, which is exactly what we don't need. When you stimulate
input or productivity, you produce more of the quality goods people
want, and the prices of those products are down if there is enough
productivity. But when you try to stimulate consumption for a fixed
number of goods, obviously the price of those goods goes up. There is a
fear of inflation in our society today, and that is precisely what this
kind of Keynesian stimulus will produce.
This matter of focusing on inputs, as I said, is where the second
philosophy of economic growth comes in--supply-side economics, which
focuses on productivity. The fundamental principle of supply-side
economics is that people work harder and take more risks when there are
more opportunities for economic gain and less government intrusion.
Translating this economic philosophy into policy means several
things--first of all, reducing government consumption by cutting
spending, thus leaving resources in the private sector.
I mentioned food stamps before. The government can only give money to
food stamp recipients by taxing the money of someone else or borrowing
the money. Eventually, that borrowed money needs to be paid back. How
is it paid back? It is paid back by taxpayers paying money to the
government, which can then repay its debt. In either event, eventually
the money the government spends to stimulate the economy has to come
from somewhere, and the only place it can come from is the American
taxpayer.
The bottom line is, with Keynesian stimulus spending, there is no
free lunch. The money doesn't materialize out of nowhere. It is not
free for the government to inject this money into the economy by giving
it to favored groups or to redistribute it to people within our society
so they can spend it. That is why this factor some people talk about
that we actually get more money back than we put in is wrong in two
ways.
First, as I pointed out before, there is no empirical evidence that
ever happened. Secondly, eventually, the money has to be repaid or, if
it was taxpayer money to begin with, that is $1 less taxpayer money
that that taxpayer has to invest or to consume or, if it is a
businessperson, to hire someone in the private business.
The bottom line is, government money isn't free. So the whole premise
of Keynesian economics that we get a free dollar someplace and that
produces benefits by people then spending it is wrong. How about
leaving it in the pocket of the person whom we want to spend it in the
first place? Chances are that person can make a more intelligent
decision about what he or she needs than the U.S. Government.
Second, as I said here, we are talking about incentives in the
marketplace which are based, by every economic study, on long-term
policies: long-term tax policies, long-term regulatory policies. An
individual small businessman, for example, wants to know what the law
will be 2 and 3 and 4 years out before he decides to hire a new
employee he is going to have to pay taxes for, whom he is going to have
to provide potentially a health benefit for, certainly a salary. If he
doesn't think that government policy over that long term is going to
enable him to continue to employ the individual, he is not going to
hire him in the first place.
Another thing that supply-side economics means is that the worst
thing we could do, especially in economic down times, is to raise taxes
on anyone but certainly not on the very employers we count on to hire
more workers. Who is the first to hire coming out of a recession? It is
small business.
So the very people we are asking to hire more Americans to put them
back to work are the people who would be impacted by the taxes the
President
[[Page S5486]]
talked about the other night. He is talking about taxing ``wealthier
Americans.'' What does that mean? It means people who make incomes
above $200,000, and that happens to be the group that represents the
bulk of the small business entrepreneurs in America. Fifty percent of
all small business income is paid in those top two income tax brackets
on which the President would raise taxes.
So the very people we want to hire more workers, we are going to
impose more taxes on; and then we are going to expect them to hire more
to reduce unemployment so we can have greater economic growth? It
simply doesn't work that way.
The final point has to do with regulations. More and more, the
President seems to be acknowledging that the runaway regulations of his
administration are actually beginning to harm business and job
creation. This is why he has announced his effort to try to streamline
the regulations and get rid of any that don't work; why he withdrew a
proposed regulation from the Environmental Protection Agency recently
that would have had a very negative impact on business. He is beginning
to recognize that his administration is a big wet blanket over
businesses these days because of their burden of regulations. We cannot
stimulate the economy or job growth with the government imposing more
and more costly regulations on American business every day.
The President set up a false choice in his speech the other night. He
said: We have to do away with these job-killing regulations. But, he
said, I will not do away with the regulations which protect the
American people from--and then he named a litany of things he wants to
protect the American people from.
Nobody is talking about eliminating all regulations or having unsafe
food or unsafe products for little babies and the like. We are not
talking about that. We are talking about the issuance of thousands and
thousands of pages of new regulations every month by this
administration at an extraordinary cost on American business with very
little regard for a cost benefit--in other words, how much society
benefits versus the cost of these regulations imposed on business.
By the way, when I say the cost imposed on businesses, who pays?
Businesses are the people in the business. The consumers end up paying
the cost of the regulations which obviously are passed on. So this is,
again, another indirect tax on the American people. That is why I said
before, no tax--but especially in a time such as this--whether direct
or indirect, is a good idea because of the negative impact it has on
job creation.
The bottom line of all this is, there are two basic theories. The one
theory basically says we can get something for nothing. The government
will get money, forget where it gets it. But when it gives it to
people, they will spend it. When they spend it, then whatever they
spend it on, that producer has to produce more of those things so they
will have to hire somebody to make more of them. But that is exactly
backward. It doesn't work that way.
The supply-side theory says, first of all, the money didn't come to
the government free. It had to be taken out of the private sector. The
government either had to tax somebody, so they have $1 less to spend,
or it gives an IOU, which means eventually the taxpayers have to pay
the taxes to repay the IOU. In either case, that is $1 taken out of the
economy. It is $1 not there in the private sector for an entrepreneur
to hire someone or to produce something.
So the supply-side economics says, let's look at the other side of
the equation. Rather than focusing on consumption, let's focus on
productivity where technology, labor, and capital can produce more, can
make a society more productive, more wealthy, where more people can
have work, they can have better paying jobs. What they produce has
greater value, and people are willing to buy it, as a result of which
they put more money back into the economy. That is the cycle that
produces wealth, and it is the cycle that has caused economic growth
and job creation and wealth generation in this country now for over 200
years.
It begins with the proposition that job growth starts in the private
sector, that government doesn't create jobs, that money starts with the
people, the taxpayers. They generate the income, and the government
gets a piece of that in the way of tax revenue. But the money belongs
to the people, not the government. Third, there is no magic when the
government somehow gets $1 in order to redistribute it so somebody can
buy something with it. We have to remember where the dollar came from.
It didn't materialize out of thin air. It started with a hard-working
taxpayer who earned the dollar and then either paid it to the
government in taxes or is paying it in taxes to repay a debt that the
government incurred in order to borrow money for a stimulus package.
As we think about the President's proposed third or fourth stimulus,
however we count it now, I hope we can keep these economic theories in
mind: There is no free lunch. There is no free money. Eventually, the
taxpayers are who create the wealth and the job creators create the
jobs. If we keep those principles in mind, I think we will look a
little bit more skeptically on the notion that we can somehow target
job creation with yet another stimulus bill and that is going to get us
out of our economic woes.
If my colleagues will keep these principles in mind, I think we will
make wise decisions and prevent the country from going even deeper into
debt and try to focus on the long term so businesses can actually make
decisions based upon long-term thinking rather than based upon the
ephemeral effects of short-term stimulus.
The PRESIDING OFFICER (Mr. Blumenthal). The Senator from Wyoming.
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