Two fundamental myths about government desperately need to be debunked for the well-being of the U.S. economy in the near term and over the long haul.
Myth #1: Government spending will boost – or “stimulate” – the economy.
This mistaken idea has been floating around political circles for at least eight decades. At the start of the Great Depression, President Herbert Hoover jacked up federal outlays by almost 50 percent. His successor, President Franklin D. Roosevelt, then tripled spending over the following eight years, before U.S. entry into World War II.
The idea is that government gets the economy moving by ginning up aggregate demand. British economist John Maynard Keynes attempted to give such political escapades intellectual legitimacy in his 1936 book “The General Theory of Employment, Interest, and Money.”
But despite – or more accurately, due to – government’s activism during the administrations of both Hoover and FDR, the U.S. economy wallowed in depression for more than a decade. We then shifted into a war economy for another four-plus years. It wasn’t until after World War II that the economy started to return to some kind of normalcy.
Whatever you want to call it – the New Deal or Keynesian economics – it was a dismal failure. Unfortunately, though, many historians of the era either don’t understand economics, or are just blinded by a left-wing ideology. Thus, it remains hard to find a history textbook, for example, that does not the get the economics of the Great Depression dead wrong.
For good measure, generations of economics students were fed Keynesian nonsense, producing scores of economists who, in effect, do not understand how the economy actually works. That’s troubling, to say the least.
As a result, for more than two-and-a-half years now, we’ve been fed a steady diet of public policies focused mainly on cranking up government spending – from bailouts to other special-interest expenditures – that is supposed to “stimulate” the economy.
But that hasn’t worked out too well, has it? Of course, no one should be surprised when the economy suffers because massive amounts of resources are drained away from productive private-sector efforts, and thrown at politically driven escapades.
Interestingly, while politicians, historians and many economists fool themselves, solid majorities of the American people understand. And that was the case during the Great Depression and continues to be today.
Oddly, it was left-wing economist Paul Krugman on his ~New York Times~ blog who recently noted a Gallup poll on government spending from 1938. Only 37 percent agreed and 63 percent disagreed when asked, “Do you think government spending should be increased to help get business out of its present slump?”
In addition, when asked which would be more effective in ending the depression, a mere 15 percent said increased government spending, while 63 percent said reducing taxes on business.
And in late July of this year, a Rasmussen Reports poll found 28 percent of voters believed increased government spending was good for the economy, while 52 percent viewed increased government spending as bad for the economy. Another 12 percent said more spending had no effect.
So, for decades now, it remains a minority of Americans who have bought into the myth of more government spending being positive for the economy. Now, we just need far fewer politicians who are fooled by such economic silliness.
Myth #2: Government workers are paid less than their private sector counterparts.
For a very long time, the idea was that a tradeoff existed. A government job basically meant less compensation but increased job security. If that was ever the truth, it most certainly is not the case anymore.
On Sept. 8, the U.S. Bureau of Labor Statistics released its latest analysis on employee compensation. In June 2010, private employers spent an average of $27.64 per hour worked for employee compensation. Wages and salaries accounted for $19.53, with benefits averaging $8.11.
In contrast, state and local governments forked over an average of $39.74 per hour worked for employee compensation. That’s 44 percent higher than average private-sector compensation.
Hourly wages and salaries for state and local government workers came in at $26.13. That topped private workers’ by 34 percent. As for benefits, the $13.62 per hour for government employees ran ahead of private workers’ by 68 percent.
So, it’s not even close these days – government work is a more lucrative gig, on average, than is a job in private business.
There are severe problems under this scenario. Most obvious are the costs for taxpayers – both individuals and businesses. There’s no way getting around the reality that a high level of compensation for government workers – including growing and threatening pension and health benefits – is a key driver of increased taxpayer burdens.
In addition, there is the problem of getting what you pay for. The public sector is not known for its high level of productivity. In the private sector, compensation is tied to productivity. That simply is not the case in government, where compensation instead is linked to political pressures and special-interest influences. As a result, high levels of compensation for less productive government work serve as negatives for the overall economy.
In order to thrive, our economy needs less government, including less pay for government workers, in order to free up resources so that entrepreneurs, investors and businesses can grow the economy, and create productive, good-paying private-sector jobs.
-Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.