January 2023
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin.” Earnest Hemingway
During the 1980 Republican presidential primaries, Ronald Reagan’s primary challenger was former Central Intelligence Director, George H. Bush. During the debates, Bush used the pejorative term, voodoo economics, to denigrate Reagan’s proposed economic policies, which included lower taxes, reduced regulation, smaller government, and a strong dollar.
After winning the primaries, Reagan offered his former rival the VP spot, which he accepted. Not surprisingly, Bush quickly changed his tune on economic policy, and became an advocate of supply side theory. Over the course of the next eight years, federal spending (as a percent of GDP) dropped from 21.5% to 17.67%, inflation dropped from 13.5% to 4.1%, and unemployment decreased from 12.5% to 4.4%. Not coincidentally, real wages increased as did the US dollar.
A lot has changed over the past several decades. We now live in an era of macroeconomic superstition. Much of what academic elites think they know about monetary and fiscal policy just ain’t so. One such example being the Fed’s recent experiment with Modern Monetary Theory, which created an inflationary wave they have yet to be able to contain. In addition to the pain inflicted by the rapid rise in consumer prices, the primary monetary medicine used to combat rising prices is higher interest. After decades of historically low rates, the Fed’s sudden pivot caused three of the four largest bank failures in US history, have made home purchases nearly impossible for everyone but the rich, and effectively doubled the net interest payments on federal debt in just three years.
Another example of economic delusion is the purported relationship between federal spending and economic growth. Demand-side spending schemes, like the COVID stimulus checks, can and do temporarily boost spending, which in the short-run goose GDP. But how much of the stimulus money was invested in R&D, capital equipment, or innovative technology? While Amazon, Best Buy, and Nordstrom’s enjoyed a big increase in sales, it came entirely at the expense of US taxpayers. Future taxpayers, to be more specific.
Proponents of demand-side policies typically cite the multiplier effect, which alleges that for every dollar input (money supply, fiscal spending, capital investment, etc.) there is a corresponding increase greater than $1. But there is zero empirical evidence to support this myth. When it comes to government spending programs, instead of a multiplier effect you instead end up with diminishing marginal returns. To illustrate, since 2020, federal debt has increased an alarming $9 trillion. Over the same period, US GDP increased ~$6 trillion. Simply put; the juice wasn’t worth the squeeze.
While the official numbers have yet to be printed, the US budget deficit (federal tax revenues collected minus federal outlays) for 2023 is forecast at $1.7 trillion, or 6.5% of GDP. Absent the Supreme Court’s decision to strike down the $333 billion student loan forgiveness plan, the projected deficit would have exceeded $2 trillion or 8% of GDP. This is an alarming number, especially in light of <4% unemployment, ~2.8% GDP growth, and no prevailing crisis. Over the next decade the CBO forecasts federal outlays will exceed revenues by >$20T, and that’s without consideration of/for the next “crisis.”
Over the past fifty years Uncle Sam has ceded virtually all control and, thus, responsibility of the economy to the Federal Reserve, which treats all economic maladies with a single cure; loose monetary policy. To a man with a hammer, as they say. But as Einstein lamented, the definition of insanity is doing the same thing over and over again but expecting a different result. It’s high time policymakers concede that their Keynesian witchcraft is a failed religion, and rediscover the economic salvation that comes from voodoo economic policies.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
pathwaytoprosperity.com
Voodoo Economics
January 2023
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin.” Earnest Hemingway
During the 1980 Republican presidential primaries, Ronald Reagan’s primary challenger was former Central Intelligence Director, George H. Bush. During the debates, Bush used the pejorative term, voodoo economics, to denigrate Reagan’s proposed economic policies, which included lower taxes, reduced regulation, smaller government, and a strong dollar.
After winning the primaries, Reagan offered his former rival the VP spot, which he accepted. Not surprisingly, Bush quickly changed his tune on economic policy, and became an advocate of supply side theory. Over the course of the next eight years, federal spending (as a percent of GDP) dropped from 21.5% to 17.67%, inflation dropped from 13.5% to 4.1%, and unemployment decreased from 12.5% to 4.4%. Not coincidentally, real wages increased as did the US dollar.
A lot has changed over the past several decades. We now live in an era of macroeconomic superstition. Much of what academic elites think they know about monetary and fiscal policy just ain’t so. One such example being the Fed’s recent experiment with Modern Monetary Theory, which created an inflationary wave they have yet to be able to contain. In addition to the pain inflicted by the rapid rise in consumer prices, the primary monetary medicine used to combat rising prices is higher interest. After decades of historically low rates, the Fed’s sudden pivot caused three of the four largest bank failures in US history, have made home purchases nearly impossible for everyone but the rich, and effectively doubled the net interest payments on federal debt in just three years.
Another example of economic delusion is the purported relationship between federal spending and economic growth. Demand-side spending schemes, like the COVID stimulus checks, can and do temporarily boost spending, which in the short-run goose GDP. But how much of the stimulus money was invested in R&D, capital equipment, or innovative technology? While Amazon, Best Buy, and Nordstrom’s enjoyed a big increase in sales, it came entirely at the expense of US taxpayers. Future taxpayers, to be more specific.
Proponents of demand-side policies typically cite the multiplier effect, which alleges that for every dollar input (money supply, fiscal spending, capital investment, etc.) there is a corresponding increase greater than $1. But there is zero empirical evidence to support this myth. When it comes to government spending programs, instead of a multiplier effect you instead end up with diminishing marginal returns. To illustrate, since 2020, federal debt has increased an alarming $9 trillion. Over the same period, US GDP increased ~$6 trillion. Simply put; the juice wasn’t worth the squeeze.
While the official numbers have yet to be printed, the US budget deficit (federal tax revenues collected minus federal outlays) for 2023 is forecast at $1.7 trillion, or 6.5% of GDP. Absent the Supreme Court’s decision to strike down the $333 billion student loan forgiveness plan, the projected deficit would have exceeded $2 trillion or 8% of GDP. This is an alarming number, especially in light of <4% unemployment, ~2.8% GDP growth, and no prevailing crisis. Over the next decade the CBO forecasts federal outlays will exceed revenues by >$20T, and that’s without consideration of/for the next “crisis.”
Over the past fifty years Uncle Sam has ceded virtually all control and, thus, responsibility of the economy to the Federal Reserve, which treats all economic maladies with a single cure; loose monetary policy. To a man with a hammer, as they say. But as Einstein lamented, the definition of insanity is doing the same thing over and over again but expecting a different result. It’s high time policymakers concede that their Keynesian witchcraft is a failed religion, and rediscover the economic salvation that comes from voodoo economic policies.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
pathwaytoprosperity.com