GorT has written about taxes, Keynesian economics, and the current economic situation before but I’m always impressed when I read pieces that add a new dimension to it. This is the case with the brilliant piece by Victor Hanson here. I have long argued that individual income is consciously or unconsciously segregated into five buckets:
- taxes – which go to the federal, state and local governments for various programs that the individual gets some amount of services in return (we could have a debate over the “fairness” of the amount contributed versus the relative benefit received and the partial benefit the more wealthy gain by having a country that, as a whole, is better off).
- charity – a direct transfer of wealth in order to help those – temporarily or extended – less fortunate.
- investment – savings or investments to preserve and, hopefully, grow accumulated wealth – which, as a side benefit can be used to generate more wealth by allowing others to make use of the capital for new ideas, efforts, products or services.
- mandatory spending – GorT defines this as any cost that the individual needs to make to maintain their current standard of living. Generally, think of mortgage, rent, food (but not excessive dining out as entertainment), water, heat, education, etc. Things that for the most part need or have made an obligation to pay. This is not to say that these can’t change as you’ll see below.
- discretionary spending – the fun stuff – vacations, entertaining, movies, new gadgets, gifts, etc.
Income remains relatively constant for the gainfully employed. The amount coming in to the financial picture is a known quantity and the individual allocates (either by happenstance or via a budget) the income into these five buckets. If a bucket requires more money – mandatory spending on home repairs, new taxes, high food costs, etc. – then other buckets suffer. Temporary increases can be mitigated with savings but only if that investment bucket has sufficient funding in the past. Americans have be woefully under-budgeting that bucket. So let’s turn to Mr. Hanson’s piece:
For decades the liberal argument was that the New Deal cured the Depression. But in a new twist, the war has suddenly been reinvented to support the current arguments of the new Keynesians — despite the irony in the embrace of the old right-wing argument that it was the World War II defense spending, not FDR’s New Deal, that finally got America out of a near-decade-long depression.
In ingenious fashion, the new argument insists that the second downward spiral of 1937–38 — formerly ostensible proof that five years of the New Deal and of anti-business rhetoric had not worked — should be attributed only to FDR’s lacking the will or political muscle to stay the course and accelerate deficit spending, redistribute more income, and grow far bigger government. Then luckily the war came along. That crisis provided the necessary political landscape, which had been lacking during the supposed Keynesian backsliding of Roosevelt’s second term, to force through the long-awaited New New Deal. At last, the really big scare allowed the really big borrowing, and the result was the really big prosperity for the next half-century.
Right? Remember Krugman’s recent blathering about the need for a space alien attack to help save the economy? Mr. Hanson continues:
But as many have pointed out, there are all sorts of problems with this account. During World War II, the American public scrimped and saved. If household income increased, so did household savings — not surprisingly, given the rationing of many consumer goods and total unavailability of others. Washers, dryers, hot-water heaters, vacuum cleaners — all those and more were bought for the first time after the war, and often without borrowing.
In other words, there was plenty of private postwar investment capital and household money waiting to be tapped when the shooting stopped and millions came home — especially for basics such as new cars, trucks, tractors, and appliances.
So can a post-WWII analogy apply here? Doubtful as the parallels just aren’t there:
In short, in 2011 there is nothing that suggests the present massive borrowing will lead us to anything like the prosperity of the postwar years — a time when social spending and entitlements accounted for 30 percent, not 70 percent of the annual federal budget; when households both had cash and were eager to buy long-denied items; when America did not import high-cost oil (having recently supplied 80 percent of its wartime allies’ oil needs from domestic production [emphasis GorT’s]
Go back and read his piece over at the Corner. It’s well worth it and dispells the spin that the liberals are touting.