Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Bio
X •  LinkedIn
   Bob Stein
Deputy Chief Economist
Bio
X •  LinkedIn
 
  Big Government Causes Slow Growth
Posted Under: GDP • Government • Monday Morning Outlook • Spending

In 1930, Pluto was declared the ninth planet.  In 2007, it was demoted to "dwarf planet" status by astronomers after considering new evidence.  There are now only eight planets.

Also in the 1930s, the ideas of John Maynard Keynes came of age.  In spite of a massive amount of evidence that these ideas don't work, unlike astronomers, economists won't demote Keynes's theories to the dustbin of history.

This isn't that surprising.  Whether Pluto is a planet, or not, doesn't impact politicians, or their constituents.  If it did, Pluto might still be categorized as a planet.

Keynes thought a free market economy should be managed: in fact, needed to be managed.   His ideas flourished in the 1930s when the US was in the Great Depression.  Keynes believed that a lack of consumer demand was the culprit to economic problems and government should spend to boost jobs and economic activity.

To this day, in the name of Keynes, economists and politicians support stimulus spending, unemployment benefits, minimum wages, and the redistribution of income.

Not only do politicians and bureaucrats get to increase the size of their budgets and take credit for benefiting constituents, but they get to do it in the name of helping the overall economy.  They do it in the name of Keynesian economic theory.

But there is no evidence it has worked.  Keynes's theories, as mentioned earlier, have been around for over 80 years.  Countries all over the world have tried them.  Government budgets have increased dramatically.

This spending encompasses food stamps, welfare, unemployment benefits, Social Security, Medicare, Medicaid, ethanol, solar, wind, and electric vehicle subsidies.  State and local governments have boosted the minimum wage and created special subsidies and income support for citizens.  Other countries have single-payer healthcare systems and even bigger budgets relative to GDP than the United States.

But there is no economic nirvana anywhere.  After 80 years of growth in government, and little economic growth to show for it, doesn't anyone think we ought to stop and question the underlying assumptions that support these Keynesian policies?

Since the current expansion started, U.S. real GDP has expanded at just a 2.1% annualized rate.  At the same time government spending, tax rates and regulation have increased.  These government burdens reduce entrepreneurial activity, jobs, income growth and push companies out of the U.S.

But many ignore this correlation between bigger government and slower growth.  Instead of blaming government there are endless non-government excuses for slow growth.  Some blame demographics and some blame weak investment by companies.  Other explanations include income inequality, foreign trade, the residual effects of the financial crisis, or government debt levels (which result from low tax receipts.)

All of these explanations shift the blame to the private sector for slow growth and support Keynesian, big-government policy.  Unfortunately, government is funded by taxing incomes and profits of business activity or borrowing the wealth generated by that activity.  It's true that government can help create a positive environment for business, by, for example, enforcing the rule of law and contracts.  But the U.S. long ago surpassed the pro-growth level of spending.

The point is government doesn't create wealth.  The private sector does.  No matter what Keynesian theories say, it's a truth politicians and bureaucrats don't find very appealing.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist

Click here for PDF version

Posted on Monday, January 9, 2017 @ 10:21 AM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Search Posts
 PREVIOUS POSTS
The Trade Deficit in Goods and Services Came in at $45.2 Billion in November
Nonfarm Payrolls Increased 156,000 in December
The ISM Non-Manufacturing Index was Unchanged at 57.2 in December
The ISM Manufacturing Index Rose to 54.7 in December
Watch the Spending
M2 and C&I Loan Growth
2017: Dow 23,750, S&P 2700
New Single-Family Home Sales Increased 5.2% in November
Personal Income was Unchanged in November
New Orders for Durable Goods Declined 4.6% in November
Archive
Skip Navigation Links.
Expand 20242024
Expand 20232023
Expand 20222022
Expand 20212021
Expand 20202020
Expand 20192019
Expand 20182018
Expand 20172017
Expand 20162016
Expand 20152015
Expand 20142014
Expand 20132013
Expand 20122012
Expand 20112011
Expand 20102010

Search by Topic
Skip Navigation Links.

 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.