Doing Good Versus Feeling Good

Doing Good Versus Feeling Good

Mark Lazar’s July 2021 Newsletter

It is a paradoxical truth that tax rates are too high and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the rates—Cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus. John F. Kennedy

After posting the second best first half return for the S&P 500 in the past two decades, domestic markets started the third quarter in similar fashion as all major indices finished higher coming out of the chute. In addition to posting solid gains the first week of the new quarter, July 2 marked the sixth consecutive session of fresh new highs on the S&P 500, closing above 4300 for the first time ever.


Item YTD Change
Dow Jones Ind Avg 13.16%
S&P 500 Index 15.01%
Emerging Market Index 6.46%
Barclays Agg Bond Index -1.88%
10-Year Inflation Forecast 2.33%
2021 GDP Growth Forecast 5.7%
Unemployment Rate 5.9%

*Market index data as of 5/31/2021


According to the White House, the new infrastructure bill will create millions of “well paying” jobs. The initial plan includes funding for multiple areas of infrastructure spending including expanding high-speed internet availability, repairs to roads and bridges, upgrades to the power grid, electric vehicle charging stations, and other clean energy projects. Sounds great!

Before going further, let’s do a quick economic refresher. The law of supply and demand explains the relationship between the supply of a good (or service), and consumer demand; as the price increases, demand falls. And as the supply rises, the price falls. For example, if the price of beef increases $2/pound, consumers will buy less steak. This concept can be illustrated graphically via supply and demand curves. And if the price of steak rises, consumers will buy more chicken and pork, as they are less expensive protein substitutes.

There are two opposing schools of thought in regard to how to grow the economy. The famous twentieth century economist, John Maynard Keynes, is considered the father of demand-side economics. Keynes’ theories suggest the use of government spending and monetary stimulus (weak dollar policy) leads to increased demand, and boosts economic activity. In other words, when the economy contracts, in addition to dovish monetary policy, Uncle Sam should step in with public works programs, expanding government payrolls, etc.

Conversely, supply side economists argue that a business-friendly environment leads to increased capital investment, greater employment, increased productivity, increased aggregate supply/decreased costs, and increased tax revenue (faster nickels versus slower dimes). Supply siders focus on fostering a free market environment by reducing the tax burden for individuals and corporations, reducing regulatory hurdles, free trade, and a stable dollar monetary policy

Which is better/more efficient, you might ask? To illustrate, let’s look at government COVID economic stimulus policies; in 2020, public health response/shutdowns resulted in a 3.5% drop in GDP in the US compared to a 6.27% decline in the European Union. At first glance, the US policy response was more effective. But to determine policy efficacy we need to compare and contrast the cost of (Keynesian, demand-side) fiscal stimulus. US COVID stimulus (relative to GDP) was 26.46%, whereas the EU allocated 11.14%. The US spent 15.32% more but only experienced a 2.77% economic benefit. Where did the other 12.55% go? If demand side economics is effective, shouldn’t we enjoy at least a one-for-one increase in GDP for every dollar spent? And what about the mythical multiplier effect? If true, output and aggregate demand should have increased by a factor greater than one. 

Where did governments get the money for fiscal stimulus? Historically they tax or borrow (deficit spend) the funds. More recently, they now print it. US national debt soared to ~$28 trillion by the end of 2020; a $5 trillion, or 21% YOY increase. Not surprisingly, the US dollar fell 7.5% last year. According to the CBO, debt service (interest) on Treasury securities will be $534 billion this year, and doubles to $1.1T in ten years. If you want to know one of the primary reasons sovereign debt yields are near record lows, every developed country would default on its debt in a handful of years if interest rates were to return to historic averages.

Unlike pro-growth economic policies, which ultimately shift the long run aggregate supply curve to the right (by boosting capital investment, innovation, risk-taking, entrepreneurship, and hard work), and increase real wealth, demand-side economics merely confiscates money from the private sector and spends/redistributes in a manner the state believes is best. But there is no state; only individuals (on both sides of the political aisle) who generally support economic policies based on ideological or party beliefs as opposed to merit. Good policies are neither Republican nor Democrat. The same holds true for bad policies.

In the same manner that an individual, over the course of a year, might use a new credit card to eat out every night, buy new clothes, and take some fabulous vacations, demand-side policies oftentimes provide a short-term economic boost. But eventually the debt will need to be repaid, and the person merely enjoyed a better quality of life today, only to have a reduced standard of living in the future. For those who might argue that governments are different, it’s worth noting that there’s never been a single time in recorded history where a government has spent its way to prosperity. Ever. Wealth creation only occurs in the private sector. As government increases in size and scope, the private sector is reduced, and so too is economic growth and the ability to increase wealth.

While no one can argue the need for repairing roads, bridges, and water systems—which should be regularly and systematically maintained from day-one, as opposed to allowing them to fall into a state of disrepair—to propose a government spending plan will create jobs is a fallacy. If true, then wouldn’t it make sense to double government spending to create twice as many good paying jobs? The truth is government spending crowds out the private sector, competing for financial capital, intellectual capital, and labor (factors of production), which is why companies like Apple, Microsoft, Amazon, Google, and Tesla come from free market societies rather than socialist or Marxist regimes. Government spending programs always sound and feel good, but history is abundantly clear that the benefits never equal the cost.


Mark Lazar, MBA
Senior Vice President-Investments
Certified Financial Planner™

Views expressed in this newsletter are the current opinion of the author, but not necessarily those of Raymond James & Associates. The author's opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks. The Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. It is not possible to invest directly in an index. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Gross Domestic Product (GDP) is the annual market value of all goods and services produced domestically by the US. The information in this article is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may not be suitable for all investors. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Raymond James is not affiliated with any of the organizations listed above. Neither Raymond James Financial Services no any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. Be advised that investments in real estate and in REITs have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investments in REIT's will fluctuate with the value of the underlying properties, and the price at redemption may be more or less than the original price paid. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.