Government Borrowing Drains Business Investment

This article at RealClearMarkets by Louis Woodhill of The Club for Growth does a pretty good job explaining why government spending never does much to stimulate the economy, and in fact (if you accept that the government is less efficient at creating jobs than the private sector given the same amount of dollars invested) destroys more jobs than it creates.

The money government spends does not grow on trees or fall like manna from heaven. It does not appear out of nowhere. Sure, it can be printed, but you can only do so much printing of money before you start devaluing your currency and investors worldwide start pulling their money out of the dollar, at which point the dollar collapses and drags the economy down with it. Bernanke's Federal Reserve has printed about $1 trillion since last fall, but the banks in trying to right themselves have in total increased their capital reserves by about $800 billion, so they have mostly offset each other. Look for inflation to ramp up once the banks start lending more again, later this year or sometime next year. Watch closely to see how well Bernanke can head off inflation at that point.

The second way government can obtain money to spend is via taxes, but Obama was so adamant about only raising taxes on those making over $250,000 that he cannot politically get away with raising taxes on incomes below that level. And even if he taxed those making over $250,000 at 100%, he could not generated nearly enough money to pay for all his spending. In any case, he hasn't raised any taxes yet, but between the energy cap-and-tax that might pass Congress soon and the expiration of the Bush tax cuts looming in the next couple of years, the expectation of higher taxes is already changing economic behavior with those most likely to have their taxes raised starting to spend less, which doesn't help consumer spending, which is what keeps businesses in business employee people.

(calculate your potential new tax burden at taxfoundation.org if cap-and-trade passes -- mine will be a little over $1000 per year)

But the third and primary way government is getting the money to spend right now is by borrowing. As Woodhill points out in the article I linked to above, government borrowing means investors buying government bonds instead of using that money for private investment. The more the government borrows, the less private business investment (PBI) there is. The less PBI there is, the less jobs are created. This is exactly why the number of public sector jobs is growing while the number of private sector jobs is shrinking. IT IS BECAUSE OF ALL THIS BORROWING AND SPENDING!

Think about it, Obama. You suck all the private investment out of the economy, and then you scratch your head wondering why the economy is shedding jobs as a whole even as your stimulus dollars are directly creating some jobs. It's because you are preventing more jobs from being created through reducing PBI than you are creating/saving through increased government spending. In the meantime, you consolidate more power in Washington along with all the corruption, fraud, waste, red tape, and loss of freedom that goes along with it.

What we should be doing is encouraging PBI, by steps such as:

Reducing the Capital Gains Tax Rate (to encourage investment)

Reducing the Corporate Tax Rate (highest in the world)

Minimizing government borrowing as much as possible

Making the Bush tax cuts permanent (so "the rich" will be more likely to invest money instead of keeping it in short term savings to prepare to pay higher taxes)

Stop preventing higher domestic energy production

Instead Obama is doing exactly the opposite, out of "fairness" no doubt. He is:

Proposing to let the 2003 Capital Gains Tax Rate Cut lapse

Proposing to leave the Corporate Tax Rate at 35% and tighten the screws down even HARDER on companies who make profits overseas, which will drive more jobs out of America (already there was a story yesterday of a Canadian company that was incorporated in Deleware but is changing status so its headquarters are now in Canada which has a corporate tax rate in the low 20's)

Spending like there is no tomorrow, and he will have to borrow more and more as the Porkulus spending ramps up even more later this year and into the next, not to mention other spending like a $600 billion "down payment" on health care deform

Proposing to let the Bush tax cuts expire for those in the top income brackets

Taking no action to allow any energy production other than uneconomical "green energy" to expand, while at the same time raising energy costs through cap-and-tax which will raise costs for almost all businesses and decrease their ability to keep/hire employees

Obama and the Democrats are busy enacting exactly the wrong policies. If Woodhill is right, unemployment is headed for 14% by next year.