How do we know the stimulus package made the economic situation worse?
Compare the U.S. and Canada. Their unemployment rates increased in lock step from August 2008 until six months later, in February 2009, when the stimulus was passed in the United States. During those six months, the U.S. unemployment rate rose by 2.1 percentage points, from 6.1 percent to 8.2 percent, and the Canadian rate grew by 1.9 percentage points, from 5.1 percent to 7 percent (using the BLS [Bureau of Labor Statistics] measure to make the Canadian measure of unemployment comparable to the U.S. rate). The graph that we have showing this is actually stunning.
Canada adopted a much smaller and quite different “stimulus” program that emphasized cutting tax rates and regulations and that produced dramatically smaller deficits. On a per-capita basis, Canada’s stimulus was about a third that of America’s, costing $979 per person compared to our $2,730. The conservative Canadian government chose not to introduce any big programs.
Obama, meanwhile, adopted big-ticket Keynesian programs, believing that government spending for its own sake creates wealth. But Democratic emphasis on “green” energy, government-approved investments and technology and higher salaries for public-school teachers merely moved money away from where Americans and companies would have otherwise spent it.
Obama’s stimulus also raised the effective marginal tax rates that some individuals face, discouraging work; Canada, by contrast, cut some marginal rates. Obama kept the corporate tax rate stuck at 35 percent, while Canadians cut their corresponding rate from 21 percent in 2007 to 16.5 percent this year — with a further cut to 15 percent planned for next year. By last year, Canada had the lowest overall tax rate on business investment of any major industrialized country.
Canada also didn’t run the huge stimulative deficits that we ran here in the U.S. They didn’t saddle their kids with a huge debt that they were going to have to pay off.
But if Obama’s program — including a massive 21 percent hike in spending from 2008 to 2011 and corresponding massive deficits — worked so well, why has our unemployment rate risen more since those policies were adopted than have the rates of the European Union, South America, Japan, Australia or New Zealand?
How serious is our looming entitlement crisis?
The publicly held U.S. federal debt was $3.4 trillion by the end of 2000, shortly before George W. Bush became president, and by the end of his tenure after eight years, it rose to $5.8 trillion in 2008. Publicly held debt excludes the money that the government owes to itself. Now the publicly held debt has reached about $11 trillion. Obama has almost succeeded in doubling it during just three years. For the average family, that means their share of the federal debt went from $87,000 to $140,000. If Obama remains the president for a second term, assuming no new pet projects or other changes, Obama’s projections from this year’s budget predict that each family’s share of the debt would balloon, reaching a whopping $186,000 by October 2016.
But what lies ahead is even scarier. Some economists estimate that at their current value our obligations are about $200 trillion. The longer we put off dealing with this problem the worse things will get.
Interest rates right now are at historical lows. Each one percentage point increase in interest rates adds over $110 billion to the deficit. What is a huge deficit right now can quickly spiral out of control. Interest rates could rise either when the economy finally gets back on track or if lenders begin to get more concerned about our ability to pay off our debts. The problem is that once interest rates rise, they make lending to the government riskier, which will raise interest rates further and we are off to the races. Americans need only look at what has happened in Greece or Portugal to see how quickly things can get out of control.