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American politicians are currently arguing about the debt ceiling being surpassed and not for the first time. It is quite easy to notice the same pattern occurring each time an economic emergency happens. Political parties rush to blame each other, threats are exchanged, most likely Republicans get the blame, and nothing meaningful or substantial ever changes. In this occasion as well, in the end, the ceiling will be raised, debt will most likely continue to rise, and the state will become even more interventionist.
In all likelihood, the real cause of the economic malaise sadly will once again be neglected and an important truth will be hidden – the unsustainable, debt-fueled, centralized, interventionist, economic model that has been built in the west that is the true problem.
The economic theory called “Modern Monetary Theory”, which western central banks and politicians have been following blindly has been proven disastrous, leaving us with weakened economies, a destroyed middle class, and low productivity.
For years it was erroneously said that debt and unbridled spending have no negative effects, since a country can print as much money as it wants. Central banks went along with it, financing government deficits so that billion- and trillion-dollar packages could be approved with relative ease. The problem is that all this debt was not used for productive ends, but for political interests and to assure a further and irreversible expansion of government.
For example, the $2.5 trillion CARES act in 2020 included $25 billion more for food stamps and child nutrition, $12 billion for housing, $900 million for heating assistance, $50 million for legal services for the poor, $60 million for NASA, $8 million for the National Archives, $99 million for the Energy Department on science-related spending, $3 million dollars for the Forest Service, for forest research, $75 million to the National Foundation on the Arts and Humanities and $25 million for the Kennedy Center. Maybe the reader can assess whether the millions for NASA, the National Archives, and forest research had anything to do with COVID relief.
In the last two years, the American government has spent $7 trillion dollars that it did not have, and yet, the job market continues to show negative real wage growth, with average hourly earnings decreasing 1.2 percent in 2022, the employment-to-population ratio is 60.1 percent, and the force participation rate is 62.3 percent, below pre-pandemic figures.
Consumers have had to spend all their savings. As those end, consumption will decline, affecting economic growth. On the other hand, with the rising interest rates, loan-taking will also go down, investments will take a hit and companies will be forced to intensify the layoffs, as we are already witnessing. Meanwhile, governments are paying more for interest and continuing to borrow to keep up with entitlements, subsidies, among other types of unnecessary spending.
$20 trillion in stimulus packages have been spent since 2020 in western economies. The result is these countries going into stagnation with elevated inflation. In Europe, the results of billions of dollars in aid packages have had the same results for at least a decade: high levels of debt, high unemployment rate, low productivity, and mediocre growth rates. If Keynesian demand-side policies would work, most western economies would be growing strongly with all these unprecedented stimulus packages that have expanded governments to levels not seen since the Second World War.
The only way to ease the impact of the coming economic crisis caused by Keynesian policies goes through supply-side measures that boost productivity and reduce the interference of governments. Balanced budgets, tax cuts, drastic declines in government spending, and more incentives for the private sector to hire, invest, and produce, are the only remedies. Governments always channel capital and resources towards unproductive entities and sectors, zombie companies (whose share has drastically increased in recent years) and government cronies. Supply-side measures on the other hand allow market entities – companies and individuals – to allocate resources based on the actual needs and wants of participants.
The state of Florida is a great example of these policies. As the Florida Tax Watch reports, in FY21, outstanding debt, debt service and the debt ratio all decreased, while the state accumulated significant cash reserves and had an increased debt capacity. The debate throughout the West, including Capitol Hill, should be about how to replicate these policies at a national level.
According to government data, the state’s total private sector employment increased by “496,600 (+6.5 percent) over the year in March 2022, 1.5 percentage points faster than the national growth rate of 5 percent. In March 2022, Florida’s labor force grew by 3.2 percent (325,000) over the year and grew by 42,000 (+0.4 percent) over the month. As of March 2022, Florida employers have added jobs for 23 consecutive months since May 2020. The unemployment rate is 3.2 percent, down 0.1 percentage point from the previous month’s rate and 0.4 percentage points lower than the national rate. Florida’s statewide unemployment rate has been lower than the national rate for 16 consecutive months, since December 2020.”
In 2016, the Obama administration left the economy growing at 1% using the same policies as Europe. The supply-side reforms of the following administration pushed the GDP to close to 3%, by lowering taxes and removing regulations that were killing small and middle enterprises. Because of the 45th President’s supply-side policies, in 2019 (the year before COVID-19), the median household income grew by 6.8%, which was the largest annual increase on record. America gained seven million new jobs – more than three times government experts’ projections.
Middle-class family income increased by nearly $6,000 – more than five times the gains during the entire previous administration. Median household incomes rose most among Hispanics (7.1%), blacks (7.9%), Asians (10.6%), and foreign-born workers (8.5%). For whites, the increase was 5.7%, while for native-born Americans 6.2%. Overall, poverty rates during the first term fell to a 17-year low.
In Spain, after the 2008 crisis, Mariano Rajoy’s supply-side policies led to a so-called economic miracle. The result from 2012 to 2017 was a recovery of more than half of the jobs lost during the crisis – more than 1.5 million jobs in three years were created, a decrease of 70% in the fiscal deficit, a reduction in trade deficit through the increase of exports by 33%, and a reduction of public debt to sustainable levels. Government revenue, as a result of tax cuts, increased to record highs, with corporate tax receipts rising 29%.
Unfortunately, governments are usually less inclined to hand over power to individuals and families. They would most likely prefer policies that increase their electorate’s dependence on them, even at the cost of subsequent and frequent economic crises and stagnant growth. Republicans in the House have the chance to repeat the success of the Gingrich years and break the cycle of Keynesianism, by standing on the side of common-sense policies, growth, and capitalism. If not for the sake of the people who elect them, then for their own benefit in the next elections. Such a growth stance would prove a formidable platform come 2024. They simply need the courage to stand for it!
Nikola Kedhi is the Senior Financial Adviser at Deloitte Albania. He obtained a bachelor’s degree in International, Economics, Management and Finance at Bocconi University in Milan, Italy and a master’s in Finance at Carlos III University in Madrid, Spain. He has bylines at Fox News, the Mises Institute, Heritage Foundation’s Daily Signal, the American Conservative, The American Spectator, The Federalist, American Thinker, and American Mind. // Nikola Kedhi es el asesor financiero sénior de Deloitte Albania. Obtuvo una licenciatura en Economía Internacional, Administración y Finanzas en la Universidad Bocconi de Milán, Italia y una maestría en Finanzas en la Universidad Carlos III de Madrid, España. Tiene firmas en Fox News, el Instituto Mises, el Daily Signal de la Fundación Heritage, el Conservador Estadounidense, el Espectador Estadounidense, el Federalista, el Pensador Estadounidense y la Mente Estadounidense.