Why is everyone so gloomy?

The chart above shows that there was a huge increase in federal spending as a % of GDP that began in late 2008. As I noted in a post last October, over 75% of the $840 billion allocated to “stimulus” spending in the 2009 ARRA was …

The chart above shows that there was a huge increase in federal spending as a % of GDP that began in late 2008. As I noted in a post last October, over 75% of the $840 billion allocated to “stimulus” spending in the 2009 ARRA was essentially devoted to transfer payments: taking from one person and giving to another. Only 8%, or $65.5 billion, was spent on transportation and infrastructure projects. In the post-war era, we have never seen an increase in government spending of this magnitude. So much money was handed out in such a relatively short period that it could conceivably have caused perverse incentives (e.g., rewarding those who weren’t working) that encouraged people to “drop out” of the labor force. But when you consider that the huge increase in government spending was accompanied by a huge increase in regulatory burdens (e.g., Dodd Frank, Obamacare) and a huge increase in expected future tax burdens (a direct result of the doubling of the federal debt/GDP ratio since 2007, from 37% then to over 75% today—see second chart above), then we probably have enough ingredients for this to be an important driver of the tepid jobs market.
In short, companies are holding back on their hiring plans, worried about regulatory burdens and big increases in mandated costs. And many individuals have probably decided that the rewards to working harder or returning to work are outweighed by the costs (e.g., higher taxes) to doing so. (I for one have decided I’d rather work for free on this blog than pay a 65% marginal tax rate on any new income I might generate from starting a small business.) This article has a nice summary of what Obamacare means for many colleges and many small businesses: sharply increased personnel costs, reductions in hours worked, layoffs, increased disincentives to work. One can only begin to imagine the depressing effect of the prospect of significant increases in future tax burdens that have resulted from the huge increase in our federal debt burden in recent years: after all, spending is taxation, even if it is deficit-financed. And then there is the strong likelihood that much of the increased federal spending in recent years has been a waste of our economy’s scarce resources. We’ve taken over a trillion dollars a year for four years and essentially flushed them down the toilet, spent on things that do not increase the economy’s productivity and that reward leisure or inactivity instead of work or entrepreneurial risk-taking.
The huge growth in the size, scope, and burden of government is thus the most likely explanation for why we are living through a disappointingly slow recovery. There is hope for the future, however, since…

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