You Can’t Ignore Numbers
A year ago, America was completely different than it is now. In the last year, the government has nationalized the banking industry, taken over the worlds largest insurer (wasting well over $100 billion in the process), and taken control of two iconic car companies. Last week, Congress agreed to a plan that will cost nearly $800 billion. Between actions by Congress and the Obama administration, as much as $3 trillion was pledged to government bailouts last week! This amounts to 21.7% of American GDP (US GDP is 13.7 trillion). This new spending is more than government’s entire 2008 budget of just under $3 trillion. Every penny of this money is being financed with debt. This will raise the size of the national debt substantially. Our national debt currently stands at roughly $10.7 trillion. If we add another $3 trillion to the debt, our debt will increase by 28% and will be roughly equal to our GDP!
Of course, even Mr. Obama has admitted that there is no guarantee that these plans will work. Even more interesting, he has said that these plans will have little effect before 2010. This is particularly interesting because the non-partisan CBO recently estimated that the recession will supposedly be over in mid 2009 even if these “stimulus” plans werent passed, meaning that Mr. Obama’s plans wouldnt even begin working until after the economy has already started to heal itself.
But, lets pretend that Mr. Obama’s boldest predictions are correct and that this plan will create 4 million new jobs (although he says it will create or save 3-4 million jobs). Let us also assume that each of these jobs is a high paying job of $100,000 a year and that these jobs are permanent jobs that will never go away in the future, regardless of future circumstances. According to both H&R Block’s tax calculator and the Heritage Foundation’s much simpler tax calculator, a single person earning $100,000 pays $19,472 in Federal taxes. So, the 4 million jobs that we are pretending this plan will create will return $77.888 billion in taxes per year to the federal government. Excluding any interest (which will likely be a hefty sum and will go countries like China), it will take the government about 35.5 years to recoup the money!
If, however, this plan still creates 4 million jobs but these jobs pay $50,000 per year instead of $100,000, the government will collect $6,606 in taxes per person totaling $26.424 billion in taxes per year. Under these circumstances, it will take the government 113.5 years to recoup the money!
However, I made a little Excel spreadsheet assuming that the government would have to pay 3% interest on these new loans. This is a generous assumption, considering that the average rate on treasury bills has been much higher. I used both of the above jobs assumptions in my calculations and found that the government will actually never be able to recoup this money if interest is factored in! Check it out for yourself.
Americanly Yours,
Phred Barnet
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I appreciate your time in doing this. While I am leaning more towards the stimulus plan (cause we need it), I gave your argument some thought.
Unfortunately, we are caught between a rock and a hard place right now. I do not pretend to have the right answers either.
The problem with your illustration (and I have not opened your Excel file due to security concerns these days) is that you have not factored in the ‘velocity of money’. This is the powerful weapon! Higher velocity means more revenue generated for businesses and that means more taxes collected. It also means more people hired and the cycle carries on.
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