[Congressional Record (Bound Edition), Volume 157 (2011), Part 9]
[Senate]
[Pages 13314-13316]
[From the U.S. 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, 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

[[Page 13315]]

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 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

[[Page 13316]]

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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