Why “Prime The Pump” Government Spending Isn’t Working

by David Reavill

Last week, we looked at the Nation’s GDP for the First Quarter of 2023. At a growth rate of just 1.1%, it was less than half what analysts had predicted just a month ago. Now, it’s been an article of faith in Washington that the more the Government spends, the more it boosts the Economy. Here we have the biggest spender of all time in Joe Biden, yet the Economy is slowing. The question is, why?

Why did a tried and true strategy that worked for so long now no longer function? Of course, much of the “credit” for the slower Economy goes to the Federal Reserve, which has the full monetary brakes on. But it’s much more than just increasing interest rates that has this Economy down. Today we are exploring a couple of significant changes in the Economy that are likely why “Prime the Pump” no longer works.

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We are watching history unfold before our eyes. Each day President Biden goes into his office, he sets new records for Government Spending. Think Donald Trump was a big spender? He pales in comparison to Joe Biden. Trump was the first President to have a trillion-dollar budget, which doubled the largest budget in our history.

On the other hand, Biden’s Budget, just presented, is five times larger than Trump’s! So large that if Biden continues to spend like he is, he will leave office in two years or six, having created more Government Debt than all other American Presidents who went before him.

But according to the Bureaucrats in Washington Bureaucrats that doesn’t matter. They tell us that government spending boosts the Economy. When the Government spends big, it creates more jobs and more jobs mean more sales for the stores and shops in the country, and the Economy expands.

It’s a concept that’s been around since the 1930s when then-President Franklin Roosevelt adopted that concept from an economist named John Maynard Keynes. It was Keynes’ idea that by increasing consumption (more jobs), the Government would help bring the country out of the Great Depression.

It was a concept that went against all of the conventional economic thinking of the time. Classical economists saw production, not consumption, as the way out of hard times. But to Keynes’s great credit, when Roosevelt implemented those kinds of programs, they worked! And America rose from the ashes of a devastating Depression.

And from that point onward, it was accepted Gospel among the Washington Elites that when the Economy got into hard times, the Government ought to step up and “prime the pump,” in other words, spend like crazy.

Even under a massive spender like Lyndon Johnson, government spending seemed to support economic growth. Johnson, you’ll recall, thought that he could create a tremendous social welfare program called the Great Society while simultaneously fighting the Viet Nam War. In a sense, Johnson was right. He was the last President to have an economy that grew at better than 5%, although this growth also came with very high inflation.

The key to understanding why Government Spending worked so well back then is to realize that the American Economy was essentially a closed system. Stimulus worked because it boosted American enterprise. Those excess Government Dollars went directly into American Citizen’s pockets. Which they, in turn, spent in American stores.

However, as you and I have discussed, the Economy radically changed in the 1980s and beyond. The American Multinational Companies took many of those jobs off-shore. Today almost the entire technology sector has its manufacturing jobs overseas. Pharmaceuticals, electronics, and heavy industry are all the same.

As a country, we went from having a balance between production (primarily industrial) and consumption to a 30:70 ratio, where most of our economic activity is consumption. While we shop at Walmart, most of the goods that Walmart sells to us are made by foreign workers.

So when the Government puts money into the Economy as it did with the stimulus, the money still goes into American pockets, but only long enough for us to transfer those payments to Chinese and other workers outside of the United States. In short, the history of excess US Government Spending over the last 40 years is that we’ve done a marvelous job of boosting the Chinese Economy. How do you think that China has grown its Economy as they have since the 1970s? That right: through US spending.

So that’s the first reason Biden’s Massive Spending isn’t helping our Economy. It’s because the Economy has so much “leakage,” the wages and profits of goods sold in the United States by foreign companies or the foreign subsidiaries of US Multinational companies.

Corruption is the second major factor limiting the effectiveness of Federal Spending on the Economy. However, it’s hard to overlook the growing number of financial frauds currently coming to light. The twin bank failures of Silicon Valley Bank and Signature Bank have been. There has also been the massive fraud of Samuel Bankman Fried and the FTX Crypto Exchange. Inevitably, in situations like this, when the regulators finish, they find that significant fraud is at the heart of their failure.

Transparency International has dropped the US ranking as the least corrupt among the G7 Nations to number 6; only Italy has a more corrupt rating than America. Those less corrupt countries include Japan, Germany, France, Great Britain, and Canada.

This has not gone unnoticed by the Biden Administration; just over a month ago, the Administration reported its new strategy of “Implementing  the United States Strategy On Countering Corruption.” It is a five-pillar plan to curtail corruption both domestically and internationally. Pillar Number Three, “Holding Corrupt Actors Accountable,” is fascinating.

In it, the Administration outlines how regulators, including the Justice Department and Securities and Exchange Commission, are holding individuals criminally liable for money laundering, bribery, and “multi-billion-dollar schemes.”

For those of you who are carefully following the news coming from Ukraine and China, you may wonder how this new initiative might affect a particular first son. I’m also puzzled.

In any event, financial corruption is yet another way in which Federal Spending is channeled away from ordinary citizens, thereby mitigating any benefit.

Finally, my objective is not to defend the amount of Government spending that this White House is doing.

This level of spending is over-the-top and unwarranted. As we’ve seen, even the Keynesian Argument that massive expenditures will help the Economy no longer applies to America in 2023. The portion of the Economy that is now off-shore combined with our current levels of financial corruption make any “Prime the Pump” benefit moot.