Growth of government is strangling economy

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Real (inflation adjusted) median income for American households fell $2,627 during President Barack Obama’s first term, according to a report released last week by the U.S. Bureau of Census. The number of people with incomes below the poverty line rose by 6,667,000 (equivalent to the population of Massachusetts) to 46,496,000.

The slowest postwar economic recovery ever is stalling out. The chief reasons why are:

1. Obamacare. It clobbers employment, as businesses in labor-intensive industries shift workers from full to part time to avoid Obamacare mandates. About 75 percent of the new jobs created in the first six months of 2013 were part time, the Labor Department says. The labor force participation rate is the lowest since 1978.

The practical effect of the average 41 percent rise in health insurance premiums caused by Obamacare is to drain the middle class of discretionary income. Americans will have a lot less to spend on new cars, clothes, family vacations. The auto industry, retail stores, restaurants and resorts will take hits. As their sales slump, more people will be laid off, increasing unemployment, and tax revenues will fall, widening budget deficits.

2. Federal regulations. The explosive growth of federal regulations of all types has imposed enormous costs. The Code of Federal Regulations expanded from 19,335 pages in 1949 to 134,261 by 2005. The additional regulations reduced economic growth by about two percentage points a year, economists John Dawson and John Seater calculated in a paper in June. If regulations had remained at the 1949 level, the gross domestic product in 2011 would have been $53.9 trillion instead of $15.1 trillion, they estimate.

Were it not for the additional costs imposed by regulations, median household income would have been about $330,000 instead of $53,000.

The costs of regulations are greater than the Dawson-Seater study indicates, because of the explosive growth in federal regulations since 2005. The CFR now contains 174,545 pages. More than twice as many pages of regulations have been added in the past eight years than there were in toto in 1949. And rules issued by the Obama administration tend to be broader than those issued in earlier administrations.

3. Government debt. The national debt is now $17.14 trillion. It was $5.73 trillion when George W. Bush was inaugurated; $10.63 trillion when Barack Obama was inaugurated.

Our gross domestic product is $16.6 trillion. When debt held by the public exceeds 90 percent of GDP, a “tipping point” is reached in which economic growth slows to a crawl, said economists Carmen Reinhart and Kenneth Rogoff in a 2012 paper. The tipping point actually is 80 percent of GDP, other respected economists said in a paper published in June.

Because $4.76 trillion is owed by one part of the government to another -- chiefly IOUs from the Treasury to the Social Security Trust Fund -- the portion of the national debt held by the public is just 70 percent of GDP. So we haven’t reached the tipping point yet. But we may before the end of Barack Obama’s term. The debt held by the government isn’t risk-free. The total unfunded liabilities of the federal government -- chiefly for Social Security, Medicare, and federal employee pensions -- are more than five times the official national debt.

At some point after the tipping point has been passed, adding debt causes a catastrophic collapse.

4. Near zero interest rates. Mostly to reduce the cost to the government of servicing our massive debt, the Federal Reserve has kept interest rates artificially low since December 2008.

Money creation by the Fed has kept stock prices artificially high but is wiping out the savings of the middle class, pinching retirees on fixed incomes, and -- as people search for higher yields -- encouraging risky investments, such as the mortgage-backed securities whose failure triggered the Great Recession.

It takes about $268,000 in capital investment to support each full-time equivalent job. The Fed is causing Americans to “consume the seed corn that would generate economic growth,” said economist James Dorn.

5. Proliferation of tax laws. The Internal Revenue Code now contains about 4 million words, up 977 percent from 409,000 in 1955. The national cost of compliance is 11 percent of total income tax receipts, the IRS estimates.

If the personal and corporate income taxes and payroll taxes were replaced by a single flatter (no more than two rates) tax with few exemptions, the economy would get a big boost even if effective tax rates did not decline.

A federal government that has grown like kudzu is strangling our economy. If we prune it properly, we could trigger the greatest boom in history.

Jack Kelly:

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