Government Is the Anti-Stimulus

width=71By Brian Wesbury & Robert Stein Texas Insider Report: Washington D.C.  Contrary to popular belief government spending is not stimulus its anti-stimulus. Whenever government spending rises as a share of GDP unemployment rises too. The larger the government the smaller the private sector and the fewer jobs there are. Look back at the US in the 1970s or Europe (and Canada) over the past 30 years.     Government must tax and borrow from the private sector to fund itself. Between 1975 and 1983 federal spending in the US averaged 21.6 of GDP and never once fell below 20 the unemployment rate averaged 7.7. Between 1995 and 2005 government spending in the US fell to an average of 19 of GDP and the unemployment rate averaged 5. Lately government spending has gone back to above 23 of GDP. As a result the unemployment rate will remain elevated as compared to the recoveries of the past 30 years. Yes civilian employment an alternative measure of jobs that catches small businesses and start-ups jumped a robust 297000 in December. And the unemployment rate dropped to 9.4 from 9.8. But the job machine has remained relatively weak for the past year. We do expect acceleration to 220000 new jobs per month in 2011 but even this would be less than historical recoveries have produced. Some argue this is a new and weaker normal" and that it signals a fragile underlying recovery that will be permanently at risk of a double dip. Some say debt housing and shattered consumer confidence are the cause. But in reality this is what we should expect when government has become so large. Unless spending is cut the US will look more like the Euro-zone where unemployment is now 10.1 and has been persistently higher than in the US for the past 30 years. At least the Europeans are honest. Central banks cannot offset the negative impact of government spending. Central banks can only do one thing print money. And printing money cannot create jobs or wealth in the long run if printing money could create wealth counterfeiting would be made legal. Nonetheless the Fed remains committed to this goal and there seems to be a consensus among monetary policymakers that they should remain accommodative until the unemployment rate falls to about 5.5. This means rate hikes are not likely any time soon. This makes us even more confident about our bullish call on the economy and equity markets in 2011. Easy money will continue to fuel growth for many quarters into the future. Inflation will rise but growth will come first. Inflation reared its ugly head in December with producer prices increasing 1.1 for the month. Decembers jump was the largest monthly increase since January 2010. While much of the gain was due to energy which increased 3.7 in December the bigger story about the recent PPI was deeper in the report. Further up the production pipeline crude goods prices increased 4 in December alone and are up a whopping 15.6 over the past year. Prices for intermediate goods are up 6.6 in the past year overall and core intermediate prices are up 4.5. Eventually some of these increases will filter through to prices for finished goods.  Its important to note that these inflation figures are the result of monetary policy before the Feds second round of quantitative easing had any effect which means inflation could potentially be even higher in the next two years. Brian S. Wesbury is Chief Economist and Robert Stein CFA is Senior Economist at FirstTrust Advisors where this first appeared.
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