[Noozhawk’s note: Second in a series. Click here for part one.]

The Fallout of Economic Conformity

The logical conclusion of these failed policies is economic stagnation. Here is what massive government spending and taxation has done to our economy:

» 1. Total government (federal, state and local) share of the economy has exceeded the tipping point, estimated to be 15 percent to 20 percent, which is the point when it hinders economic growth. Presently, total government spending for 2010 is estimated to be about 47 percent of the economy.

» 2. Taxation must rise substantially in order to pay for government debt, health and welfare entitlements, and other fixed government costs. The 2010 estimate of federal, state and local taxes amount to about 30.4 percent of GDP (about $4.48 trillion).

» 3. Our total government debt (federal, state and local) is estimated to be $16.635 trillion for 2010, about 114 percent of our GDP. Of total government debt, federal debt is estimated to be $13.787 trillion in 2010.

The larger the share of governments’ take of capital out the economy, the less money there is available for businesses and consumers. The less capital available for the private economy, the less it will expand, and the result will be a decline in GDP.

While progressive Utopians believe that taxation of the “rich” is acceptable to fund social benefits, mathematics, demographics and the laws of economics prove them wrong. Progressives have yet to understand that government produces nothing.

According to data, welfare states have taxes approaching 50 percent of their economies, with the median in the high 30th percentile. The United States’ tax burden on the economy of 30.4 percent is less than most of these countries. While we ramp up our welfare state, which ensures higher taxes, Europe’s welfare state services are crumbling and face drastic shortfalls as their GDP falls, as their populations age, and as their companies find better conditions abroad.

The Economics of Mass Destruction

The Organisation for Economic Co-operation and Development is an economic think-tank put together by 33 countries of which the United States is a member. Most members are economic powers. China and India are not members. It generates a lot of data, but very little useful research. It is located in Paris and has 2,500 international staff members. They take a rather hard Keynesian line.

The OECD just came out with its Interim Economic Assessment — “Recovery slowing amid increased uncertainty,” the headline read. It, like the Obama administration, is realizing that its Keynesian policies are failing.

“The world economic recovery may be slowing faster than previously anticipated, according the OECD’s latest Interim Economic Assessment. Growth in the Group of Seven countries is expected to be around 1½ percent on an annualized basis in the second half of 2010 compared with the previous estimate of around 2½ percent in the OECD’s May Economic Outlook.

“The OECD says the loss of momentum in the recovery is temporary although uncertainty has increased. …

“‘If the slowdown reflects longer-lasting forces bearing down on activity, additional monetary stimulus might be warranted in the form of quantitative easing and commitment to close-to-zero policy interest rates for a long period,’ the OECD said. ‘Where public finances permit, planned fiscal consolidation could be delayed’” (my emphasis).

It is clear that the OECD does not understand what is happening. Otherwise it wouldn’t need to suggest more fiscal and monetary stimulus if it really believed the “loss of momentum in the recovery” was only “temporary.”

Its announcement sounds almost as if the Federal Reserve had written it. Here’s what Chairman Ben Bernanke said on Aug. 27, 2010:

“Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year.  …

“We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”

The Obama administration is proposing more government fiscal stimulus spending to boost the economy.

The only thing these policies have achieved is the destruction of capital.

The Fed and other central banks have been printing money to pump liquidity into their economies. These policies aren’t working. Credit is declining, money supply is declining and the creation of fiat money is destroying capital by devaluing currencies.

Massive government spending on politically favored projects adds nothing to the economy and destroys more capital. One need only look at U.S. stimulus spending at Recovery.gov to see where the billions are going. If it worked the economy would be growing and unemployment would be declining. The opposite is happening.

How does repairing a highway in Ohio lead to economic growth? The answer is that it won’t; once the money is spent, the repair jobs go away and the capital is gone.

Is it possible that the private economy would find better things to do with that capital? We need to ask what the person whose capital was taxed away by the government was going to do with it. I am sure that the answer would be that it would be preserved or used for new economically viable businesses. Only savings, not spending, creates capital for renewed growth by private enterprise.

Eventually, governments run out of capital if they dominate their economies long enough. High taxes and a welfare state lead to lower incentives to produce and lower incentives to save. Most of these countries are still spending the capital earned in former, freer market economic times. If they destroy enough capital, they will go bankrupt and plunge their economies into serious depressions.

The outcomes of policies that destroy capital will vary from country to country, but none of them will be good. In the United States we can look forward to stagflation: years of high unemployment, low productivity and rising inflation. Japan will continue its 20 years of low productivity and deflation. China will experience capital destructive boom-bust cycles. Germany may be the sanest of all by ignoring the conventional Keynesian wisdom by cutting government spending.

A sobering thought is that these capital-destroying policies are being exported to developing countries as well. As these economies emerge from controlled economies to freer systems, they need time to amass capital to drive their growth. Most advanced economies experienced a century or more of rather hands-off capitalism before they turned into welfare states and regulated economies. China cannot morph into a dynamic capitalistic economy by burning up capital of its entrepreneurs through graft, wasteful spending and harsh regulations.

There is no refuge from the world’s plunge into massive capital destruction. At one time in history you could flee to countries with freedom and free markets, such as America. With the globalization of Neo-Keynesian economics, there is no refuge. Watch out for EMDs: the economics of mass destruction is here.

— Jeff Harding is a principal of Montecito Realty Investors LLC. A student of economics, he has a strong affinity for free-market economics. This commentary originally appeared on his blog, The Daily Capitalist.