Thursday, October 27th, 2016 MST

Austerity is coming. Excessive government spending guarantees it.

Austerity Leeds
The evidence continues to mount that government spending kills the real economy. In the game of wealth redistribution, every dollar the government takes from the private sector is one less dollar spent by the private sector. For every job that the government creates, a job is lost in the productive economy. At best you could argue that this is a zero sum game, that we are no better or worse off on the whole. But even this is wishful thinking as it assumes that a government agency — with no personal stake or profit-loss motive — is as efficient a producer as a private company which must compete in the marketplace. In reality this is never the case, and money spent by the government is always used less efficiently while producing an inferior result. Since the payroll tax increase at the beginning of 2013, we are seeing the inevitable consequences. In a addition to Walmart, other major retailers are starting to speak out about its negative effects.

Fred Deluca, founder of Subway Restaurants recently said: “The payroll tax is affecting sales. It’s causing sales declines.”

Darden Restaurants, which owns Olive Garden, LongHorn Steakhouse and Red Lobster, stated: “There were difficult macro-economic headwinds during the last month of the quarter…Two of the most prominent were increased payroll taxes and rising gasoline prices, which together put meaningful pressure on the discretionary purchasing power of our guests.”

Even Family Dollar is feeling the sting. Its CFO, Mary Winston, revealed that: “At Family Dollar where the average customer makes less than $40,000 a year, the combination of a two-percent hike in the payroll tax, rising gas prices and delayed tax refunds has created a challenging time and an uncertain time for the consumer right now. In our case anything that takes money out of our customer’s wallet gives them less money to spend in our stores.”

The best thing the government can do for the long term prospects of the economy is to cut the size of government. Despite this relatively straightforward concept, there still exists a popular refrain that austerity doesn’t work. It is argued that a cut in government spending will create unemployment for some government employees. In the short term this is true. It is also how an efficient economy operates. And only an efficient economy can produce a real rise in the average standard of living for everyone. There was certainly a increase in unemployment among buggy whip makers after the rise of the mass produced automobile. But ultimately, better jobs were created in the auto industry and the average standard of living of everyone benefited from it. The real tragedy of austerity is that superfluous government positions were created in the first place. And like all bad investments, eventually they must be unwound and the losses absorbed.

So with the increase in payroll taxes, the anti-austerity crowd can take solace in the fact that somewhere a new position for a bureaucrat was created, probably one with decent benefits and a pension. The question they need to ask themselves is: how is this sustainable when the real economy is already unable to pay for the government it has? Debt and money printing can only go on for so long. Like a household that lives $2000 a month beyond it means and puts the difference on a credit card, austerity is coming. We can choose to do it on our own terms by living within our means or we can have market force it on us all at once.

3 Responses to “Austerity is coming. Excessive government spending guarantees it.”

  1. RK in TX

    I’m confused. Is austerity coming before or after hyperinflation? With enough austerity, wouldn’t that prevent hyperinflation? Are you saying hyperinflation isn’t coming after all?

    • PaulC

      Well hyperinflation is certainly one mechanism by which the market can force austerity all at once. It’s difficult for the government to spend money if no one accepts it as payment. And yes, if Washington DC lived within its taxable means, the dollar would not be at risk of significant devaluation. I believe that the dollar will eventually lose its reserve currency status and that it will be significantly devalued, but I don’t see it going away in a Zimbabwe style hyperinflation.

  2. Paul Blumenthal

    I like to keep one historical fact in mind: in 1922 Germany had hyperinflation and went bust. In 1938 it’s economy was strong enough to support an effort of going into a world war.

    Yes, it’s good to be bearish on the US in the short and medium term. Don’t ignore it long term though. Right after the hyperinflation is over, the US might be the best market to be in.


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