Government Growth Measures Endanger the Economy

You could almost imagine Larry Summers making the announcement, pinky finger to his lip and affecting his best Dr. Evil impersonation, “We’ll call him…Mini-Stimulus.”

Summers, President Obama’s top economic policy wonk, this week advocated a second, smaller round of stimulus measures in order to sure up the precarious economic recovery. About $200 billion ought to do it, so says Summers. Never mind that this is the same “recovery” Summers could, until very recently, be heard lauding for its strength and resilience. Now, apparently, it needs a bit of help; help that comes, as usual, from involuntary contributions by taxpayers – present and future – and the ongoing, though increasingly worn, kindness of foreign strangers. More debt, in other words…precisely what the nation does not need. But we’ll let Summers do the talking:

“It has in recent years been essential for the federal deficit to increase as the economy has gone into recession and has been severely constrained by demand,” the man who imploded the largest college endowment fund in America’s history assured the audience, without so much as a hint of irony.

“And I cannot agree with those who suggest that it somehow threatens the future to provide truly temporary, high-bang-for-the-buck jobs and growth measures.”

Nobody would argue that “high-bang-for-the-buck” jobs are a key element to sustainable economic growth. That’s virtually a given. But we would certainly take issue with the assertion that the government is in any position to provide such employment. We want to know, does a census worker provide “bang for the buck?” How about the people who hammer in those signs by the side of the road: “This sign is paid for by funds from the American Recovery and Reinvestment Act.” How much bang are these guys providing per taxpayer buck? And what about Summers himself? We’re not about to cast disparaging remarks about the guy’s character but, seriously, are taxpayers getting any bang for their buck out of this man?

Sleepy Summers
Summers: In need of some stimulus himself?

In all honesty, we would prefer it if the world-improver community all took a long nap. At least then they wouldn’t spend their time dolling out lavish appropriations of other peoples’ money to go-nowhere projects and vote-buying, make-work schemes. Alas, the meddlers are on the job, both in the United States and all around the world. You can barely throw a copy of Keynes’ “General Theory” without hitting some bozo in the head who thinks he can spend money more efficiently than those who earned it in the first place.

Down Under, for example, in your editor’s old stomping ground, modern economic theorists are hard at work killing the goose that provides Australia’s golden eggs. Earlier this month, the Rudd administration revealed the findings of the Henry Tax Review, said to be the most comprehensive tax overhaul for the country in decades. Among the key recommendations was a 40% Resource Super Profits Tax (“RSPT” for the acronym-obsessed antipodean reader), supposedly designed to afford all Australian citizens a “fair share” in the country’s mining profits.

According to figures from Citigroup, the RSPT would effectively raise the tax on mining companies operating in Australia to 58%, making it the least competitive environment in the world to do business. It’s been a while since we last lived in Australia, but we don’t recall theft and wealth redistribution ever being “fair.” Maybe we missed something. But leaving aside for a moment the government’s alleged role of promoting personal liberty, protecting property rights and enforcing the rule of law, and the fact that nobody has a legitimate claim to resources other than those who invest their time and risk their capital extracting them, the proposed tax has proved an unmitigated disaster for the Australian mining sector. In fact, Moody’s estimates that mining companies’ earnings may be cut by up to one third when the tax takes effect in 2012.

Predictably, shares of the two Aussie giants, BHP Billiton and Rio Tinto, were seen to be down by as much as 18% this month. Both have since indicated that some future projects in Australia – projects that would ostensibly employ thousands of workers and further pad the nation’s superannuation (retirement) funds – are now “under review.” Rio, itself the world’s third-largest mining company, announced it will spend over $400 million to boost iron ore output in Canada, citing the “attractiveness of investing” there. BHP has said the tax would “stymie” investment and Fortescue, Australia’s third-largest iron ore exporter, this week suspended $15 billion of projects in the great Southern Land, citing the onerous tax. And let’s not forget the Aussie dollar, once seen by investors as a kind of de facto natural resource currency, which has slid almost 14% against the greenback this month.

And yet, rather than scoff at the embarrassing situation in Australia, other nations have decided to follow the Aussies down the same road! Chile, the world’s biggest copper exporter, is considering levying a temporary mining tax increase to help pay for earthquake reconstruction there and Brazil, the world’s second-largest iron ore exporter, behind Australia, has indicated it may tax shipments of exported commodities or raise royalties there. The worrying trend has led some commentators to begin whispering phrases like “resource nationalism” and “mining tax contagion.”

Our advice to central planners, from the northern to the southern hemispheres: Please, go back to sleep!

Joel Bowman
for The Daily Reckoning

The Daily Reckoning