Good Government Spending: Myth Busted!
Treasury Secretary Tim Geithner is out trying to promote the administration's free-spending policies.
He's pushing back against Republicans who are calling for immediate budget cuts and long-term reform for social security and Medicare. To bolster his campaign for tax increases instead of deeper cuts, Geithner tried to sell you this:
“There is a powerful myth today in the American political debate that suggests the weakness in the American economy is a result of too much spending. Too much growth in government. And there is no basis; there is no credible argument in support of that.”
Now, when Geithner says "spending," he means government spending.
But this "myth" isn't busted. It's been proven!
Three professors at Harvard Business School did a huge study on what increased government spending does to the private sector. Their conclusion?
"We find strong and widespread evidence of corporate retrenchment in response to government spending shocks."
Now, to put that in English:
When the government increases spending, companies cut back. They significantly reduce capital expenditures, R&D, and employment. And they suffer a drop in sales growth. It's called crowding out.
And it's not just that government dollars replace private money.
So much of that spending is anti-business.
Here's what University of Maryland Economist Peter Morici told me today:
"The growth of government spending in recent years is discouraging investment. Too much of the increase has been for regulation and compliance that push up the cost of creating jobs. The same goes for health subsidies and reforms-- those push up the cost of worker benefits."
You see, the recipe for growth is consistency. Not a government running around spending money like a headless chicken with a credit card. Tax breaks that are here today, gone tomorrow.
Sweeping health-care reform that could disappear next month. Short-term stimulus is no grounds to be building a business strategy on.
Sadly, our Treasury Secretary has fallen prey to the myth that government can grow the economy.
But for the government to give, first it must take away.
And here's where he really misses the point.
Beyond the spending, the even bigger problem is the debt it leaves behind. Debt boosts your costs, so down the line you have to raise revenue - aka taxes - to pay for it.
And that drags down the economy.
End of story.