Why the Economy Grows when the Stimulus Shrinks

by Rodger Malcolm Mitchell, www.nofica.com

At one point, I was a partner in an advertising agency. Our biggest client was the Wm. Wrigley Jr. Company, the producers of Wrigley’s Spearmint, Doublemint and Juicy Fruit gums (among myriad other brands).

The story is told about Philip K. Wrigley, son of the company’s founder who, along with a friend, was a passenger on a plane. The plane was in takeoff mode, and had just lifted off the ground.

The friend turned to Mr. Wrigley and said,

“Phil, I’ve been thinking about your business. Almost everyone in America, if not the world, knows about Wrigley’s gum. Why do you keep spending so many millions on advertising? Why not just keep that money as profits.”

Mr. Wrigley’s response was,

“This plane is going about 300 miles per hour and accelerating. If they shut off the engines, our momentum would keep us climbing for a while. But if the engines didn’t come back on soon, eventually we would crash.”

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Economy Hums Along, Proves Taxing and Spending Prognosticators Wrong
By Patrice Hill

The Washington Times Sunday, July 28, 2013: The U.S. economy has fared better than expected this year after widespread fears that $85 billion of automatic spending cuts and sharp increases in taxes imposed at the beginning of the year would snuff out growth.

Despite the unprecedented withdrawal of massive federal stimulus from the economy, the abrupt withdrawal of $600 billion of tax cuts Jan. 1, and state and local spending cuts of historic proportions in the past five years, the U.S. economic growth has trudged along at a 2 percent average rate since the recovery began in mid-2009.

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I fully expect the debt hawks to claim current growth proves the need of more austerity. Hey, we’re cutting budgets and the economy is growing. What could be clearer?

Well, perhaps the following could be clearer:

Click to enlarge

It’s a graph of federal debt held by the public, one measure of net federal spending — the same graph you saw at: [This graph predicts the future. What does it tell you? Wednesday, Jun 12 2013]

The graph teaches that:

  1. Every recession since 1959 has begun when net federal spending growth has fallen, relative to the previous year (aka austerity).
  2. Every recession has ended during a time when net federal spending growth has risen.
  3. The momentum generated by increases in net spending growth always carries the economy for several years after the economic engine slows down. About 10 years of reduced spending growth caused the recession of 2001. Only four years of reduced spending growth preceded the recession of 2008.

Why the difference? Other factors, in addition to net federal spending growth, lead to recessions. Wars, inflations, natural disasters, energy costs, interest rates, technological discoveries and implementation and unemployment, just to name a few.

Yet, reduced net federal spending growth precedes every recession. It is the one factor common to all 8 recessions.

The U.S. economy’s surprisingly good performance “breathes new life into the debate” over whether spending cuts and tax increases inevitably pose threats to growth that political leaders and economists have assumed, said Christopher Papagianis, who was a domestic policy adviser to President George W. Bush.

Look at the sharp increase in net federal spending growth that cured the most recent recession, and the sharp decrease since.

Our leaders consider a 2% – 3% growth from the abyss “good performance” — something to be thrilled about. Well, perhaps, but really, is the trend all that impressive?

Click to enlarge

Look how current GDP growth compares with previous post-recession growth rates. Not much to brag about.

Despite our leaders’ smug self-assurance that the economy can grow while net federal spending is cut, they are leading us into yet another recession. Exactly, when will it come? No one can say, because no one can predict and weigh the other factors.

But come it will, and the cause will not be a “natural” cycle. There is nothing natural about a recession. The cause will be reduced federal stimulus.

(Remember how the debt hawks made “stimulus” a bad word, and the public bought into it — as though growing the economy was something to be avoided.)

Now, slowly and surely, as our economic world once again unnecessarily collapses, our bought-and-paid-for politicians continue to fight against “big government,” and for tax “simplification” with a “broader tax base,” and against federal stimulus, and for Social Security “reform” — and the gap between the rich and the rest continues to grow.

But facts? Who needs ‘em? Right?

The Congressional Budget Office continues to forecast that the automatic spending cuts will reduce growth by about a half-percentage point and cost the economy about 700,000 jobs.

To quote the brilliant Texas Governor Perry: “OOPS!”

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Nine Steps to Prosperity:

  1. Eliminate FICA (Click here)
  2. Medicare — parts A, B & D — for everyone
  3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
  4. Long-term nursing care for everyone
  5. Free education (including post-grad) for everyone. Click here
  6. Salary for attending school (Click here)
  7. Eliminate corporate taxes
  8. Increase the standard income tax deduction annually
  9. Increase federal spending on the myriad initiatives that benefit America’s 99%

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10 Steps to Economic Misery: (Click here)

  1. Maintain or increase the FICA tax.
  2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
  3. Cut federal employment in the military, post office, other federal agencies.
  4. Broaden the income tax base so more lower income people will pay.
  5. Cut financial assistance to the states.
  6. Spread the myth federal taxes pay for federal spending.
  7. Allow banks to trade for their own accounts; save them when their investments go sour.
  8. Never prosecute any banker for criminal activity.
  9. Nominate arch conservatives to the Supreme Court.
  10. Reduce the federal deficit and debt

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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

Two key equations in economics:

  1. Federal Deficits – Net Imports = Net Private Savings
  2. Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports

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Mitchell’s laws:

  • The more federal budgets are cut and taxes increased, the weaker an economy becomes.
  • Austerity is the government’s method for widening the gap between rich and poor, which ultimately leads to civil disorder.
  • Until the 99% understand the need for federal deficits, the upper 1% will rule.
  • To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
  • Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
  • The penalty for ignorance is slavery.
  • Everything in economics devolves to motive.

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2 replies on “Why the Economy Grows when the Stimulus Shrinks”

  1. Of course he is right, though his reasoning is skewed by his vested interests, ‘a business trouble-shooter I fear. “It takes one ‘me’ to know one.” Mitchell’s laws: The more budgets are cut (My point is “trickle up, lasts beyond that event few recognise’ by domestic consumer temporary $ blindness & debt access) and taxes inceased, (My point tax has a 2 year payment lag for Corps, if they pay any at all, but is PAYE prepaid by Consumer loss at source) the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. (my point USA is not ‘a non-sovereign Nation’, it is a ‘fiat money’ dependency since Ben Franklyn’s “Pennsylvania Pound” ‘fiat invention’. Austerity = poverty and leads to civil disorder. (my agreeing point “yes Kondratiev wave suggests 2929 Depression”, but internet hastened a decade perhaps to 2019 start, and certainty of ‘anti-capitalist’& ‘de-mechanization revolution’ should come 2040-2050). Those, who do not understand the differences between Monetary Sovereignty and monetary non- sovereignty, do not understand economics. (My point you missed USA alternative will be more Sovereign Fiat paper debt, and new war to spend on temporary employment war industry “Trickle out” profits. If you really want ‘stimulus’ give it as in PRC 2013 or Australia’s 1970’s Regional Employment Development Schemes to the unemployed as local government (LG) infrastructure backlog catch-up federal grants employing Welfare recipients saving over half the grant from welfare budget & more recovered from LG shared, idle machines deployment, engineers with design work added, budget contributions, etc. Otherwise yes “The euphoric moron lower socio/economic (Non-voter USA) hasn’t a clue they just want bread. Yet as queen Marie Antoinette France said “no bread? Give them cake”. Whatever the USA richer Corporate as well as in-power politicians, pondering their interests keep talking rhetorically “every is getting better, don’t worry, borrow more, just keep consuming our offerings of Automated production” ~ they wouldn’t dare mention your 28% cdredit card costs or likely foreclosure they are advocating to the peasants?

  2. He says “I fully expect the debt hawks to claim current growth proves the need of more austerity. Hey, we’re cutting budgets and the economy is growing. What could be clearer? Well, perhaps my graph could be clearer:
    The graph teaches that:- Every recession since 1959 has begun  when net federal spending growth has fallen, relative to the previous year (aka austerity).”
     
    Rob Carter says: ‘Historic evidence is not 1959-2013, that’s Krugmanism short memories in just the 44 years of worst possible USA Corp., malfeasance, Prof. Kondratiev chose history from “Industrial Revolution or USA Independence” ‘Fiat money inventions’ as a nearer 300 year real history & statistical result of actions, for a far different conclusion.’
     
    He says “Every recession has ended during a time when net federal spending growth has risen.”
     
    Rob Carter says: ‘Prof. Kondratiev longer history proves ‘progress in new mechanized employment killers; is to blame Viz., 1776-7  Industrial Revolution-USA & Benji Franking “Fiat Pennsylvania Pound” & Independence ~ 1829 “Steam” depression ~ 1857 “Trains” recession ~ 1929 “Oil” Depression ~ 1971 “Cars” recession, 2001-8 “Chips” recession & yet to come 2019-29 “robotics” depression then 2025 end of democracy time as “socialist      de-mechanization or Un-industrial revolution” comes.” 
     
    He says “The momentum generated by increases in net spending growth always carries the economy  for several years after the economic engine slows down. About 10 years of reduced spending growth caused the recession of 2001. Only four years of reduced spending growth preceded the recession of 2008.”
     
    Rob Carter says: ‘USA richer Corporate as well as in-power politicians, pondering their vested interests keep talking rhetorically “everything is getting better, don’t worry, borrow more, just keep consuming our offerings of Automated production” ~ they wouldn’t dare mention your 28% credit card costs or likely foreclosure they are advocating to the peasants?’
     
    He asks “Why the difference? Other factors, in addition to net federal spending growth, lead to recessions. Wars, inflations, natural disasters, energy costs, interest rates, technological discoveries and implementation and unemployment, just to name a few.”
     
    Rob Carter says: ‘The very reasoning Kondratiev chooses 230 years historic effects, not the 44 years above proposed, sure those are the causes and War, inflation, natural disasters, energy, interest & technology the fodder of Corporate America agreed. Peasant 84% don’t even vote so why worry just feed the 52% richer of the 50mn voters or the 26mn middle class 24mn lower class loss.”
     
    He says “Yet, reduced net federal spending growth precedes every recession. It is the one factor common to all 8 recessions.”
     
    Rob Carter says: “I do believe I sufficiently debunked this mistake in the above.”

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