Harvard economists explain how Obama’s spending created 10.2% unemployment

Story from Yahoo news describes our new 10.2% unemployment rate.


The unemployment rate has hit double digits for the first time since 1983 — and is likely to go higher.

The 10.2 percent jobless rate for October shows how weak the economy remains even though it is growing. Rising unemployment also could threaten the recovery if it saps consumers’ confidence and makes them more cautious about spending as the holiday season approaches.

Nearly 16 million people can’t find jobs even though the worst recession since the Great Depression has apparently ended.

The unemployed rate jumped to 10.2 percent, the highest since April 1983, from 9.8 percent in September, the Labor Department said Friday. The economy shed a net total of 190,000 jobs, more than economists had expected.

The number of unemployed hit 15.7 million, up from 15.1 million. The job losses occurred across most industries, from manufacturing and construction to retail and financial. The job-loss total is based on a survey of businesses, separate from a survey of households that produces the unemployment rate.

Economists say the unemployment rate could reach 10.5 percent next year because employers remain reluctant to hire.

[…]Still, counting those who have settled for part-time jobs or stopped looking for work, the unemployment rate would be 17.5 percent, the highest on records dating from 1994.

And this is all known by economists. The Heritage Foundation reports on new research by two Harvard economists who just published a research paper on this very topic.


That is because government spending cannot create economic growth. More government spending, whether financed by taxes or borrowing, only takes money from one sector of the economy and transfers it to another. The government creates no new spending power when it redistributes money so it creates no new economic growth.

As the Heritage Foundation has pointed out, a stimulus package that lowered marginal tax rates instead of spending massive amounts of future generation’s wealth would actually create jobs and help pull the economy out of the Great Recession. That is because lower marginal tax rates would increase the incentives of people and businesses to work, save and invest – the very ingredients needed to create economic activity.

These findings are backed up by a new study, “Large Changes in Fiscal Policy Taxes Versus Spending,” authored by Alberto F. Alesina and Silvia Ardagna – both Harvard economists. Alesina and Ardagna find that:

…tax cuts are more expansionary than spending increases in the cases of fiscal stimulus. Based on these correlations…the current stimulus package in the US is too much tilted in the direction of spending rather than tax cuts.

In addition to their findings that tax cuts are better at promoting economic growth, Alesina and Ardagna found that spending-based stimuli are actually associated with lower economic growth rates.

The problem is that Democrats like Obama don’t know anything about economics, and they don’t care. They know less about economics than my keyboard. In fact that is exactly what being a Democrat means. It means that you know nothing about economics, but prefer to create policy based on feelings, rather than facts. Economics is irrelevant – they just want to be loved. It’s narcissism.

Economics in One Lesson

We are going to have to pay for all this spending on Obama’s favored special interest groups eventually, and that means that taxes will go up, or that the value of the dollar will go down, due to inflation. It has to be one or the other or both. There is no third way.

Perhaps it is time to review Henry Hazlitt’s Economics in One Lesson, chapter 4, entitled “Public Works Mean Taxes”.


Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers.

And consider Chapter 5 as well, entitled “Taxes Discourage Production”.

In our modern world there is never the same percentage of income tax levied on everybody. The great burden of income taxes is imposed on a minor percentage of the nation’s income; and these income taxes have to be supplemented by taxes of other kinds. These taxes inevitably affect the actions and incentives of those from whom they are taken. When a corporation loses a hundred cents of every dollar it loses, and is permitted to keep only fifty-two cents of every dollar it gains, and when it cannot adequately offset its years of losses against its years of gains, its policies are affected. It does not expand its operations, or it expands only those attended with a minimum of risk. People who recognize this situation are deterred from starting new enterprises. Thus old employers do not give more employment, or not as much more as they might have; and others decide not to become employers at all. Improved machinery and better-equipped factories come into existence much more slowly than they otherwise would. The result in the long run is that consumers are prevented from getting better and cheaper products to the extent that they otherwise would, and that real wages are held down, compared with what they might have been.

There is a similar effect when personal incomes are taxed 50, 60 or 70 percent. People begin to ask themselves why they should work six, eight or nine months of the entire year for the government, and only six, four or three months for themselves and their families. If they lose the whole dollar when they lose, but can keep only a fraction of it when they win, they decide that it is foolish to take risks with their capital. In addition, the capital available for risk-taking itself shrinks enormously. It is being taxed away before it can be accumulated. In brief, capital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. The government spenders create the very problem of unemployment that they profess to solve.

What Obama did, in effect, is to fire all of those millions of private sector people, so that he could reward the people who voted for him. Jobs are created far more efficiently by small businesses than they are by big government. When you take money out of the private sector, which creates jobs easily, and give it to the public sector, which is inefficient and wasteful, you lose jobs.

George W. Bush cut taxes in his first term and created 1 million NEW JOBS. Obama has LOST 3.4 million jobs in a few months with his trillions of dollars of spending that the private sector cannot pay for. Government spending is a job killer. And no amount of charm and teleprompter reading is going to change the laws of economics.

4 thoughts on “Harvard economists explain how Obama’s spending created 10.2% unemployment”

  1. Bogus.

    Tax cuts may be an incentive in general, but in the specific conditions of 2008, when companies were losing money, tax cuts were not an incentive.

    With regard to government spending, it may be true that in the long run it does not create economic growth, because taxes are needed to pay for the spending. However, in the short run it works, if the government spends on durable goods, because the firms see their orders go up right away, and the tax consequences only appear later. Some economists assume that firms are omniscient, and account for the long term consequences right away, but that doesn’t happen in the real world.

    The reason that the unemployment rate is so high is that the panic of 2008 was very severe. It was inevitable it would go this high, if not higher. Note also that the unnamed president who was in charge back in 1983 was Reagan. He ended up winning a 49 state landslide 18 months later. The Democrats will probably take a beating in 2010, but the economy will probably be soaring by 2012.


    1. By tax cuts I mean payroll tax cuts for domestic employees. I.e. – Harvard economist Gregory Mankiw’s plan. That absolutely would have stopped the job losses and it was the Republican plan.


      1. Payroll tax cuts would make more sense than corporate tax cuts. However, from what I recall during the debate 6 months ago, the experience with payroll tax cuts as a stimulus before was that they were going into savings and not being spent, because people feared job loss. The justification for infrastructure spending is that the money would actually be spent.


        1. I am a supply-sider. Savings is how new products are developed and new products drive consumer demand. The stimulus money was not wisely spent, as you know. It’s public works spending, with all the waste and corruption that entails, i.e. – making vending machine food more healthy.


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