Government spending kills the real economy

In case you missed them, there were a couple of stories this week that revealed a great deal about the current state of our economy. The first was from Bloomberg concerning several leaked emails from Walmart executives. According to Jerry Murray, Walmart vice president of finance and logistics:

“February MTD sales are a total disaster… The worst start to a month I have seen in my ~7 years with the company.”

And in another from Cameron Geiger, senior vice president of Walmart U.S. Replenishment:

“Have you ever had one of those weeks where your best- prepared plans weren’t good enough to accomplish everything you set out to do? Well, we just had one of those weeks here at Walmart U.S. Where are all the customers? And where’s their money?”

Where indeed? What could possibly account for this missing customer money? Perhaps David Gallager, CEO of Town Sports International has the answer. In a conference call on February 19th he stated:

“As we moved into January, membership trends were tracking to expectations in the first half of the month, but fell off track and did not meet our expectations in the second half of the month. We believe the driver of this was the rapid decline in consumer sentiment that has been reported and is connected to the reduction in net pay consumers earn given the changes in tax rates that went into effect in January.”

And he later followed up with:

“We’ve seen consumer sentiment change drastically within the last couple of months. We saw that after the first payroll period in January.”

So almost immediately after the tax hike on working Americans, we see evidence of Krugman’s fundamental fallacy. Despite economist’s best efforts at obfuscation, economics really isn’t hard. In fact, it’s mostly common sense. If the take home pay of the average American decreases, they are left with less money for the goods and services they would have normally purchased. The businesses that would have garnered those sales are forced to contract – the government confiscates private capital and the private economy shrinks.

What’s even worse is the fact that the increased tax rate doesn’t even result in a real increase in revenue as a percentage of GDP. As the private economy shrinks, so does the amount of taxable revenue. Hauser’s law (see graph below) is an empirical relationship that says the government can never really collect more than 20% of the GDP as a result of the economy killing effect of government spending.

The bottom line is this: If you want a productive economy and a high average standard of living, you must first minimize the size of government.