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The disappointing June jobs report demonstrates yet again that the strategy of stimulating the economy through increased government spending does little more than protect government jobs. When compared to the Reagan era strategy of stimulating the economy through across the board reductions in tax rates, our research reveals that 10 million jobs have not been created due largely to this fundamental error in economic policy.
The results speak for themselves: After 16 months of the most rapid peace-time increase in discretionary Federal spending in history, total jobs in June were 2.4 million below where they stood in February 2009. Government employment is up by 200,000, though most of those are temporary census jobs. But the private sector has lost a staggering 2.6 million jobs. Since the stimulus period began, the unemployment rate has actually increased by 1.3 percentage points to 9.5%. And that rate may be headed higher. The 83,000 private sector jobs added in June, and the 33,000 added in May are far below the estimated 150,000 jobs that generally need to be created just to absorb new entrants into the labor force.
Those that defend these abysmal results claim that without the increase in government spending, the economy would have been even weaker, the total number of jobs lower, and the unemployment rate even higher.
However, a comparison of the current results with those that followed the Reagan across the board reduction in income tax rates on January 1, 1983 provides strong evidence that the Obama Administration's strategy of attempting to create jobs through a government centric spending program and tax rebates is itself deeply flawed.
The 1983 tax rate reductions, which were passed in 1981, also took place against the background of a global economic emergency. The economy was suffering from its second bout of double-digit inflation in 7 years. Interest rates had soared well above 10% as the Fed put the economy through a monetary wringer in what proved to be a successful effort to bring inflation back under 5% and restore confidence in the dollar. In December 1982, the yield on 3-month Treasury bills was 10.7%. Corporations with a Baa credit rating had to pay 16% to borrow money, and the mortgage rate to purchase a new home was 11.9%. The civilian unemployment rate stood at 10.7%
Relative to the size of the economy, the Reagan tax cuts were roughly the same size as the Obama stimulus plan. Yet, 16 months later, in April of 1984, total jobs were up 5.6% and private sector employment was up a robust 6.8%. Relative to today's workforce, the strategy of reducing the burden of government by reducing tax rates created 7.5 million private sector jobs while maintaining total government employment. During those 16 months, the unemployment rate fell nearly 3 percentage points to 7.8%.
Tax rate reductions "“ as opposed to tax rebates and increased spending "“ lead to higher employment and economic activity because they increase liberty by reducing the barriers to doing business. Income taxes are the equivalent of tariffs, but they fall on domestic, as opposed to international trade. Just as a reduction in tariffs on international trade leads to more trade, a reduction in domestic tax rates on corporate, individual and investment income leads to more commerce among the residents of the United States. And, this increased level of investment and consumption leads to more jobs.
Increased spending fails to stimulate jobs growth because it does nothing to decrease the barriers to domestic economic activity. The whole idea that government spending increases aggregate demand conveniently ignores that government has no money. Each and every dollar government spends is taken from the private sector either in the form of higher tax collections or increased borrowing. Simple double entry bookkeeping demonstrates that the net cash flow into the economy from an increase in government spending is zero.
If the government were able to earn a competitive return on its investments, and provide goods and services more efficiently than the private sector, then it could stimulate job creation. But, when government hands money that it has taken or borrowed from individuals and companies in the private sector to the same or other individuals and companies in the form of rebates, or when it uses that money to produce goods or services less efficiently than the private sector, then government spending decreases the wealth of our society and reduces aggregate economic activity. The result -- a loss of 2.6 million private sector jobs.
Bottom line: After 16 months, the so-called "stimulus" bill has produced a 10 million jobs gap compared to what could have been accomplished by empowering the private sector through across the board reductions in the tax rates on personal, corporate and investment income. And that's the TruthinJobs report.
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