Tag Archives: Henry Hazlitt

MUST-READ: Why Obama’s spending took us to 10% unemployment

First, let’s see Obama’s record on economic policy. (H/T ECM)

$1,650,971,205,167 added to the national debt, bringing the total to $7.5 trillion.

99 banks taken over by the Federal Deposit Insurance Company.

684 banks receiving support from the Troubled Asset Relief Program that doesn’t buy troubled assets.

11.2 percent: the percentage of the federal deficit to GDP. This is the highest that ratio has been since Japan surrendered in 1945.

$164 billion spent out of the entire $787 billion in stimulus funding in the American Recovery and Reinvestment Act. Most of this has gone to Medicaid, unemployment and the Making Work Pay Tax Credit.

And, now, Keith Hennessey takes a look at Obama’s record on reducing unemployment.

Here’s the graph of total employment since Obama took office:

Employment has declined steadily since Obama took office
Employment has declined steadily since Obama took office

Now, you may be hearing Obama say that we’ve turned the corner on unemployment. For instance, look at how the White House is spinning this graph.

Hennessey writes:

Check out the slightly different slopes of the three line segments indicated by arrows.  The purple arrow shows a segment that slopes downward slightly less than the yellow arrow.  A mathematician would say the shift from yellow to purple was an inflection point, shifting the curve from convex to concave.

This is what led the President in early August to say the economy was “pointed in the right direction.”  The red arrow shows the worse news of last Friday’s jobs report, with a line that slopes downward slightly more sharply.  The curve shifted back to a convex shape, in which the slope was more sharply downward than in the prior month.

If you’re saying to yourself, “That’s ridiculous!  They’re all going down, and the differences in slopes are almost too hard to see!” then you’ve got my point.

And below I’m going to explain why Obama’s massive government spending created this worsening unemployment.

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. When employers see that higher taxes or inflation are coming, they stop hiring people because they know that higher taxes and/or inflation kills the economy.

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

Excerpt:

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. And jobs are created far more efficiently by small businesses than they are by big government. What creates new jobs is entrepreneurs with ideas who hire people. And government spending diverts money away from these efficient entrepreneurs and towards inefficient government bureaucracies.

Obama’s federal budget: thinking beyond stage one

House Republican Leader John Boehner
House Republican Leader John Boehner

Everyone who reads Thomas Sowell knows that the most important question to ask when talking about any economic proposal is “And Then What Happens?” That was the point of his one-two punch of introductory books on economics, “Basic Economics: A Citizen’s Guide to the Economy” and “Applied Economics: Thinking Beyond Stage One”. Don’t examine the intentions of the proposal. Examine the incentives it creates.

But this idea goes back even earlier to Henry Hazlitt, who wrote about it in “Economics in One Lesson”. (The link goes to a statement of the “one lesson”)

…the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Well, what are the long-term effects of Obama’s federal budget, for all groups?

Congressman John Boehner has a breakdown of some of the budget numbers on his blog.

The President’s budget calls for $1.4 trillion in new taxes that will affect every American.  There’s a $646 billion “cap and trade” energy tax; a $636 billion tax on income and small businesses; new  taxes on investors by raising capital gains and dividend rates; a resurrection of the death tax; and a reduction in charitable deductions which will result in $4 billion less in donations each year to charities across America.

But it’s worse than that. A while back, I wrote about how Obama wanted to discriminate against religious schools by denying them renovation funds. In the budget, he continues his anti-religious trend by de-funding private charities. This is the part that Christians who voted for Obama need to pay attention to, because this matters to us.

Boehner notes:

The proposed reduction in charitable deductions is especially troubling, since it would hurt charities at a time when American families are struggling and in need of assistance.

But remember, when government expands, the state becomes more secular. The capabilities and influence of private religious groups decreases as the state de-funds them and takes over their duties. Instead of people depending on their neighbors’ charity, they now depend on the state. Instead of letting workers decide where to give charity, workers are forced to fund secular government programs.

Boehner cites this Wall Street Journal piece:

According to the Center on Philanthropy at Indiana University, total itemized contributions from the highest income households would have dropped 4.8% — or $3.87 billion — in 2006 if the Obama policy had been in place.  That year, Americans gave $186.6 billion to charity, more than 40% from those in the highest tax bracket.  A back of the envelope calculation by the Tax Policy Center, a left-of-center think tank, estimates the Obama plan will reduce annual giving by 2%, or some $9 billion.

Before Obama’s budget, you might have given charity to a Crisis Pregnancy Center. Now that money could be spent by the government on coerced abortions abroad. Before Obama’s budget, you might have given charity to support William Lane Craig’s web site Reasonable Faith. Now that money could be spent destroying human embryos. Elections matter.

Representative Mike Pence
Representative Mike Pence

Congressman Mike Pence goes over the budget numbers on his blog.

The following is a summary of the Administration’s plans to increase taxes by $1.4 trillion over the next ten years.

Taxing Small Businesses: In 2010, the President’s budget will increase taxes on all taxpayers that earn more than $250,000. The majority of the burden for this $637 billion tax increase will be borne by small businesses that pay taxes as individuals. Small businesses create 60 to 80 percent of all new jobs in America. These new taxes will stifle job creation and economic growth in the midst of a recession.

Taxing Energy Consumers: The budget also proposes to raise taxes by $646 billion on consumers of oil, coal, and natural gas through a complicated “cap and tax” program that will increase the cost of energy for every American. These carbon-based fuels provide about 85% of all energy output in the U.S. This new tax will increase the cost of energy by up to $3,128 per household annually, taking more money out of the pockets of hard working families struggling to pay their bills each month.

Taxing Investors Part I: Under the President’s budget, taxes on capital gains and dividends would increase from 15 to 20 percent, increasing taxes on investors by $338 billion over ten years. These taxes would directly affect investors and shareholders, including many 401k holders and pension funds, most impacted by the declining stock market and would further discourage investments during a time when new investments are essential to jumpstarting our economy.

Taxing Charitable Giving: The budget also caps the value of itemized deductions at 28% for those with an income over $250,000 (married) and $200,000 (single), which will reduce charitable giving by $9 billion a year. The current economic crisis has severely damaged charitable organization’s ability to provide for people who are most affected by the recession, and the budget would leave these charities with at least a $9 billion deficit.

Taxing Death: The budget reinstates the death tax scheduled to be fully repealed in 2010. According to the Joint Committee on Taxation, the death tax has “broad economic effects” and one study has found that the death tax is responsible for lowering overall employment by 1.5 million jobs.

Taxing Investors Part II: The budget would more than double taxes on carried interest, increasing taxes up from the capital gains rate (15%) to the income tax rate (35%). Carried interest is interest gained on profits from investments and is generally used to pay investment fund managers based on the fund’s performance for investors. This tax hike is yet another attack on profit, private equities, and investments in the middle of a recession.

High taxes and big spending is not good for business, and therefore not good for job growth. I predict double-digit unemployment (around 12%) by year’s end as a result of this socialist budget.

Already, Gateway Pundit is reporting that Caterpillar has laid off 2,454 employees, with more layoffs on the way. Hot Air has video on the layoffs here: Obama saying that his bailout will reduce layoffs, and the CEO saying that the bailout will not prevent layoffs.

Ooops.